EUR head-fake to unnerve weak dollar longs

For awhile yesterday, it seemed that ‘riga-mortis’ had set in as Capital Markets sat patiently for the first wrong move in their opinion to occur. It’s not a finely balanced market. Investors have piled into the one directional long dollar trade and that includes growth currency dollars. Let’s be fair, the markets have not felt confident, especially after how the ‘freshly printed Greek bonds’ trade in the secondary market. Thus far, this has caused both EUR/JPY and EUR/USD to fail at an attempt to the topside. However, today could unnerve these ‘weaker’ long dollar positions. Because of the strong performances by the indexes, managers will require to hedge more dollars today. Month-end models suggest that there will be a lot of dollars needed to be sold around the ‘fixes’. Technically, this could be the ‘week’s purge that we have been expecting before NFP on Friday. Otherwise we will be back to twiddling our thumbs.

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

Yesterday was full of surprises. Firstly, US house prices posted an unexpected gain in Jan. (-0.7% vs. -3.1%, y/y). Capital market had expected another decline, but house prices have now recorded their seventh consecutive monthly gain (+0.32%, m/m-seasonally adjusted). Since the lows recorded 12-months ago, prices have advanced +3.57%. Certainly positive signs, however, some analysts believe that prices will again come under renewed pressure following the expiry of the first-time home buyer’s tax credit next month. Other factors are also expected to pressurize prices for the remainder of the year and next. Fixed income is pointing to higher borrowing costs and the release of ‘shadow’ inventories in reaction to the current advancement in prices will no doubt hurt sellers. The S&P/Case-Shiller index shows disconnect to other monthly house price indicators. This can be attributed to the seasonal adjustment element playing a larger role. The non-seasonally adjust print would show a decline of -0.39%. In the other sub-categories, there were no surprises.

Secondly, US consumer confidence climbed this month (+52.5 vs. +46.4), as consumers perceived the employment situation is about to improve. The trend is moving in the right direction. However, we are still a long’s way from the decade average, which is roughly 40pts higher. This morning we get to peek at some private employment reports. Will the market consume the data as a strong indicator for Friday’s NFP? A percentage will certainly do, while many will be able to explain away, either good or bad, the headline print.

This morning, German unemployment numbers provided the market a healthy surprise and ‘hope of a modest consumer revival’. But there remains a risk of renewed job cuts to come. The fall of -31k was the sharpest pullback in 12-months, managing to push the unemployment rate down unexpectedly to +8.0% vs. +8.1%. Even healthier, last month’s data was revised to show that unemployment was little changed, rather than rising as previously estimated. The important sub-category of hiring intentions points to a ‘continued improvement to come’.

The USD$ is lower against the EUR +0.15%, GBP +0.19%, CHF +0.15 % and higher against JPY -0.52%. The commodity currencies are mixed this morning, CAD +0.24% and AUD -0.30%. Yesterday, we witnessed some pipeline inflationary pressures in Canadian industrial product prices last month. Despite the headline print being flat m/m, core-prices advanced +0.2%. Not to be out done, the raw materials price index also advanced +0.4% in Feb. (the fourth monthly gain in five-months). Much of the reasoning for industrial prices can be attributed to the loonies’ depreciation vs. the dollar in Feb. over Jan. While raw materials can be explained by the rising costs of fuels. The market can expect the CAD to reverse this month’s print, as the currency to date has appreciated north of +3%. This week we have seen the ‘one directional oversaturated’ CAD trade weeding out some of the ‘weaker domestic longs’. Even with all the other global ‘noise’ the currency is outperforming many of its G7 members. The loonie remains a good news story with strong fundamentals. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

There was a slight turn up for the books in the O/N session. The AUD fell for the first day in three after retail sales (-1.4% vs. +0.3%) and home-building approvals (-3.3% vs. -2.1%) unexpectedly declined last month, easing pressure on the RBA to raise rates next week (+4.0%). It seems that the Cbank is getting the job done as the interest-rate increases are cooling domestic demand. Many bets were taken that Governor Stevens would again tighten as stronger fundamentals added to speculation that they needed to increase borrowing costs. Policy maker’s rhetoric had provided further market support. They reiterated that the benchmark borrowing costs need to climb toward ‘normal levels’ to contain inflation. On the face of it, last night numbers were woeful for position relying on further tightening soon. The market should expect the AUD to remain under pressure, especially after the currency outperforming in the last week in anticipation of ‘this’ hike (0.9162).

Crude is little changed in the O/N session ($82.82 up +40c). Why upset the ‘applecart’ before the reports? Crude price have not strayed too far, as investors wait for this morning weekly inventory report. The market again expects a build up in crude and a drawdown in gas supplies, but, by how much? That’s the key to get this market moving. Investors are trying to decide if we are witnessing a tightening market with a stronger job situation that will lead to an improving global economy. If that’s the scenario then the ‘bears’ may have to bite the bullet. After ending last week ‘down and out’, oil prices have advanced. This week, thus far, we have seen the Euro-zone economic sentiment increasing and the US consumer spending rising, factors that are trying to dissuade the bears from their course of action, especially after last week’s EIA report showing a bigger than forecasted increase in inventories. Crude stocks increased four-fold, rising +7.25m barrels. On the flip side, gas stocks fell -2.72m vs. an estimated drop of only -1.5m barrels. Not to be outdone, distillate fuel (heating oil and diesel) declined -2.42m barrels to +145.7m. Technically the market remains somewhat optimistic, while fundamentally, weak demand has us not so. Hence, this is the reason why we are confined to a ‘tight trading range’.

Despite gold prices remaining contained in a tight trading range, albeit somewhat volatile, a strong greenback has curbed demand for the metal as an alternative asset. The intraday trading has certainly caused some traders to suffer from price ‘whiplash’. The yellow metal was driven lower as Greece’s 7-year notes fell during the first day of trading on concern that the country will struggle to contain its deficit. Analysts believe that from a macro perspective ‘the underlying problems of the heavily indebted euro-zone economies are overshadowing everything at the moment’ and have investors both gun shy and trigger happy when coming to execution. Fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. However, the market is seeing little evidence of that demand appearing just yet. There remains strong support at $1,075-80 level. What about the IMF? Will they require selling gold to finance a Greek bailout? The commodities highs are getting lower and suggest that further weakness is warranted in the short term. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,109).

The Nikkei closed at 11,089 down -7. The DAX index in Europe was at 6,157 up +15; the FTSE (UK) currently is 5,694 up +22. The early call for the open of key US indices is lower. The US 10-year backed up eased 1bp yesterday (3.86%) and is little changed in the O/N session. Treasury prices stayed close to home despite reports showing that house prices unexpectedly rose in Jan. and consumer confidence increased this month more than forecasted. Losses were somewhat curtailed as equities found it difficult to maintain any traction. Technically and fundamentally, supply and the realization that there are more issues to come are starting to continuously weigh on Treasuries. With an expectation of a strong NFP print this Friday could reduce further the relative demand of government debt.

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