EUR appetite lost

So we are back to trading risk aversion. The Chinese gesture of loosening their peg status and trying to take the heat off themselves at the G20 meeting has somewhat failed. With a large percentage of the EUR record shorts been closed out after the +0.5% gradual increase in the value of the Renminbi announcement has again cleared the way for the market to begin initiating ‘new short’ EUR positions. The Euro-zone remains in the ‘middle of a structural asset allocation shift away from the regions assets among long-term investors’ as recorded by the EU FI flows and from specific flows relating to global Cbanks, and from Japanese investors. ECB member Noyer comments that ‘some banks in the 16-nation region are facing funding problems’ ahead of the stress tests disclosures next month, has again pressurized global equities. The appetite to want to own the EUR is again weak. The market seems more comfortable trading from the short side as this continues to be profitable.

The US$ is mixed in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘whippy’ trading range.

With no North American data to chew on, the market was again preoccupied with the follow through of the Chinese well timed announcement ahead of the G8 and G20 meeting this week in Canada. The smoke and mirrors gesture was not able to keep capital markets at there earlier elevated highs. The EUR’s initial euphoric spike at the weekend was seen as an opportunity for the market to sell into now that many of the record shorts had been somewhat pared. Fitch’s downgrading of BNP to AA- from AA further pressurized the EUR and again encouraged risk-aversion trading strategies to be implemented, providing a bid to bonds, the dollar and profit taking in the previously record setting gold market. With dealers watching the leakage occur, SNB Chairman Hildebrand reiterated the requirements to improve confidence in European Capital markets. He believes that the various EU governments publishing the results of their ‘stress tests’ next month will help ‘to foster market confidence and assist European banks in their capital-raising efforts’. ‘Credible stress tests can remedy this problem’.

The USD$ is higher against the EUR -0.00%, GBP -0.10% and lower against CHF +0.33% and JPY +0.25%. The commodity currencies are stronger this morning, CAD +0.09% and AUD +0.14%. At one point in yesterday’s session the loonie managed to record a 5-week high on the back of higher commodity prices and on investors paring of some of the risk-aversion trading strategies after the Chinese ‘flexible’ Yuan announcement. Their measured announcement ahead of the G8 temporarily boosted confidence in the global economic recovery and demand for assets linked to growth. Speculators continue to place bets that Governor Carney will raise interest rates faster than other developed countries. All this despite the BOC Governor stating earlier last week that ‘the uneven global recovery and prospects of renewed weakness in Europe mean that future increases in the central bank’s benchmark interest rate are not preordained’. Big picture, the CAD is holding its own after the BOC’s rate hike and somewhat muted and directionless communiqué earlier this month. It remains the world’s second best performer vs. its southern neighbor. Using the loonie as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise has speculators better buyers of the currency on dollar rallies.

The AUD has managed to retreat from its new one month high ‘again’ on concerns that funding trouble at various European banks will dampen global growth. Not helping the commodity driven currency was the Yuan falling the most in 2-years on prospects ‘that the PBOC will intervene to limit gains after dropping its peg to the dollar’. In theory, ‘commodity rich exporting countries should benefit from the increased purchasing power of Chinese manufacturers’. Earlier last week, comments from the RBA, who said that Europe’s debt crisis would ‘inevitably weigh’ on global growth, had fueled speculation that the RBA may keep rates unchanged until at least the end of the year. It seems that that ‘previous rate rises has given them flexibility to leave borrowing costs unchanged at next month’s meeting’. Last week, stronger domestic fundamentals aided the currency. Employment data added +26.9k new jobs vs. an expected +20k. It was the third consecutive month of job gains, emphasizing the RBA’s call that that economic growth will accelerate this year. This pushed dealers into increasing their bets that Governor Stevens will resume the country’s most aggressive round of monetary tightening. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy, but, that’s been called into question. With European stress test disclosures lined up and PBOC announcement failing to calm investor’s fears has technical analysts wanting to sell the currency on rallies (0.8776).

Crude is lower in the O/N session ($77.12 down -70c). Crude prices temporarily rallied to a six week high this week on increased confidence in the global economic recovery after China signaled an end to the Yuan’s fixed rate policy. The big dollar ‘too and fro actions’ vs. the EUR has tried to boost the appeals of commodities as an alternative investment. Year-to-date, the commodity has appreciated +13%.The impact of cheaper oil for Chinese consumers and the stimulus for imports is what is trying to push the black stuff’s prices higher. Earlier last week, the EIA report initially gave the market its bullish sentiment, however, weaker global economic releases managed to encourage some ‘risk-off’ trading strategies. The report was dominated by the drop in refinery capacity rates. US refineries operated at +87.9%, down -1.2% from the previous week. Gas stocks declined -636k barrels to +218.3m last week with gas demand advancing +1.6% to +9.34m barrels a day (the highest level in nearly a year). Historically, gas consumption peaks sometime between US Memorial and Labor Day in Sept. (the height of the US driving season). On the flipside, crude oil rose +1.69m barrels to +363.1m vs. an expected -1m barrel decline. Inventories of distillate fuel (diesel and heating oil) increased +1.8m barrels to +156.6m vs. an expected +1m barrel gain. Direction is dictated by demand and with ample supply and growth worries to data has had speculators wanting to sell oil futures on rallies. The direction is dependant on consumer confidence.

Bigger picture, Gold continues to be a safe heaven attraction. Over the past four trading sessions all pull backs have been bought. The commodity’s prices will remain robust on speculation that European’s Economic woes will be prolonged. It will remain bid until the stronger support levels can be broken, and that does not include the last hours trading actions yesterday. With broader risk appetite becoming subjective, the market has been capable of printing new record highs already this week. Commodity prices weakened late afternoon on Monday as profit taking gained momentum after equities could not sustain their earlier gains. Overall, on a technical perspective, the ‘yellow metal’ is trading with a greater consideration of its safe haven status. The asset class is well sought after as prices have been difficult to break down, which is, by default, technically encouraging individuals to want to own more of it for hedging purposes. Year-to-date, gold has gained +14.5%. Generally, it has become the benefactor when all other currencies fail. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet. For now, buyers are waiting in the wings to purchase product on pull backs ($1,238 -220c).

The Nikkei closed at 10,112 down -125. The DAX index in Europe was at 6,267 down -26; the FTSE (UK) currently is 5,259 down -40. The early call for the open of key US indices is lower. The US 10-year eased 4bp yesterday (3.25%) and another 3bp in the O/N session (3.22%). Thus far this week, China stating that it will allow a more flexible Renminbi had temporarily boosted confidence in the global recovery and triggered gains in equities, thus pushing yields higher. This scenario was short lived as the various asset classes were not able to build on the Asian gains. However, rumblings that the US economy’s momentum is not being built upon could continue to provide some sort of bid on deeper pullbacks. This week we have $108b’s worth of new US product to be auctioned off, starting with today’s $40b 2’s, tomorrow’s $38b 5’s and Thursday’s $30’b 7’s. As per usual, expect dealers to want to make room by cheapening the curve somewhat. However, with equities under pressure and the Fed to commit to ‘extended low rates’ there should be demand for product.

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