EUR out of breath downside

Prechter was the man, Elliott Wave was the game and now he is back on the radar again. CEO of Elliot Wave International caused a few ripples last year when he charted the EUR’s demise while most financial analysts put forth the consensus view of a dollar decline. The contrarian trade at the time was brave. Now, he is back on the scene, touting that the EUR’s downfall will reverse within two weeks. Again a contrarian trade as the market is well entrenched in this downward trend. Unless you believe the EUR goes to parity by year end there is risk reward in his thinking. It certainly backs up the commodity futures position, in that it’s potentially too heavily weighted in one direction where a natural purging is market healthy. It’s interesting to see the build up of lowered S/L’s on top. A break higher will be ugly, short term at least.

The first trading day after NFP historically is the quietest day in the month. Hopefully, we have now got that out of the way, as with no data and little market interest to do anything definitely dominated. Currency ranges remain contained as the markets waits to digest data, any data to support their convictions. The Fitch rating agency announced this morning that the ‘scale of the UK’s fiscal challenge is formidable and warrants a strong medium term consolidation strategy’ breathed some life into the markets. London share prices gilts and the currency have all fallen hard on the back of these comments. European stocks continue their downward spiral as investors shy away from the region’s assets on concern that the sovereign debt crisis will further harm economic growth. The market is trying very hard to squeeze that last technical cent out of the EUR, down to 1.1800 and then what?

The USD$ is lower against the EUR +0.29%, GBP +0.20%, CHF +0.11% and higher against JPY -0.13%. The commodity currencies are stronger this morning, CAD +0.48% and AUD +0.91%. The loonie took its time but ended up heading in the right direction, appreciating vs. the dollar for the first time in two days yesterday, as the stronger than anticipated employment release last week finally kicked in. This all occurred without the strong support of commodities and equities. When it comes to risk aversion and questionable growth, it’s the commodity currencies that are normally the most affected, but on the whole the loonie is certainly holding its own after stronger the domestic data and BOC hiking rates last week. Governor Carney hiked the key overnight rate by +0.25%, making Canada the first G7 country to do so. The tone of the statement suggests that this is not necessarily the ‘first step on a long march towards a normalization of interest rates’. Canadian policy makers are beginning to become more vocal on how the impact of Europe’s debt crisis on Canada may escalate. Carney and Finance Minister Flaherty in Korea last weekend called on economies to boost domestic demand and stated that China needs to revalue its currency as part of any effort to rebalance global growth. The market is seen using the CAD as a safer way to play an economic recovery in the US with linkage to commodities and less banking or fiscal noise to be concerned about. Until the loonie breaks out of the 3c range (1.0400-1.0700), orderly CAD buying is preferred on dollar upticks.

Eventually European debt contagion questions were bound to catch up with commodity currencies. The AUD has felt the pinch for most of this week as global policy makers seem to be heading for a collision over strategies for a recovery. However, in the O/N session, the currency got a reprieve and found favor amongst investors on the back of Asian bourses seeing black and stirring demand for higher yielding assets, at least temporarily. Questionable global growth has thus far naturally dampened demand for ‘commodity currencies’. Not containing Europe’s debt issues could lead to a global double dip and an aggressive sell off in growth currencies. So far, it seems that the crisis in Europe has not had a material impact on the Australian economy. Depending on equities and commodities, some investors are looking to sell AUD on upticks for now (0.8142).

Crude is little flat in the O/N session ($71.53 up +9c). Crude prices pared their losses and ended trading little changed yesterday as the EUR found some traction vs. the dollar. The market has been trying to digest and come to terms with the ‘weaker’ employment report and the EU debt containment efforts. Fundamentally, there’s been a change in the perception of how solid the global rebound is, as questionable growth is just leading to weaker commodity prices. Even the softer than expected weekly EIA report has done little to bolster the demand for the black-stuff. Weekly oil inventories recorded a decline or -1.9m barrels vs. an anticipated -1m. Not to be outdone, total gas inventories fell by -2.6m barrels. The market had expected an increase of +750k. On the flipside, distillates stockpiles increased by only +500k barrels whereas capital markets were expecting to double the headline print. Technicals point to the market being overbought short term. Sellers remain on upticks as investors become overtly risk averse.

Again the ‘yellow metal’ remains in demand as an alternative to the EUR, posting a one week intraday high print this morning. Technically, it becomes the benefactor when all other currencies fail. Rumors of the contagion debt effect not being contained are providing a reversal of fortunes for the commodity. The threat to global growth from Europe’s debt crisis and weaker global bourses tends to increase the demand for the commodity as a ‘safer haven’ on pull backs. The currency concern’s is only promoting a case for owning the yellow metal. Europeans are content in using the commodity as some sort of hedge against their European holdings, believing that the EUR has not bottomed out just yet. With India’s gold import numbers surpassing China as the world’s largest user of the commodity has been providing a natural. For now, the market is a better buyer on deeper pull backs ($1,244 +330c).

The Nikkei closed at 9,537 up +9. The DAX index in Europe was at 5,845 down -59; the FTSE (UK) currently is 5,021 down -47. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (3.15%) and is little changed in the O/N session. Treasuries happened to pare earlier losses as equity markets saw red. Expect dealers to push yields back up a tad so as to take down this weeks supply at a reasonable rate (3’s-$36b today, 10’s-$21b tomorrow, and 30-years-$13b Thursday). The short term bigger picture has treasury yields remaining under pressure on EU efforts to contain Europe’s debt crisis. At the moment, the market seems happing entertaining risk-off trading strategies.

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