Seller beware, EUR to rally $8b’s worth

We have witnessed the lemming trade in gold. Last year, the commodity rallied 24%. After the last two weeks of volatile trading, holding a long position is like passing a ‘hot potato’. Speculators have used any excuse to liquidate their position and in doing so have caused near panic in pockets. Are we gong to see this in the EUR over the next few days? To date, speculators and hedge funds have bet approximately $8b against the EUR. Last week’s CME numbers confirmed that the market continued to increases their position and amass the largest ever short in a single currency on European debt concerns. Oh, to be a contrarian! Any reprieve will end with crocodile tears.

The US$ is weaker in the O/N trading session. Currently it is lower against 13 of the 16 most actively traded currencies in another ‘whippy’ trading range.

After yesterday’s futile trading day where volumes and lack of participation did not save us from boredom, the rest of this week is building up to be somewhat interesting. Are we going to get policy support in Europe for the PIIG’s that will cause the markets to do away with some of their ‘risk-aversion’ trading positions? Currently, FX’land feel’s finely balanced on the edge of a knife. Trichet it seems has only to give the word and we will be off to the races. Earlier this morning, it was announced that the ECB president will cut short his trip to Australia to attend a special EU summit as concerns heighten over the debt crisis in the region. Policy makers will meet in Brussels on Thursday ‘for a special summit on the economy under pressure and to restore confidence among investors worried that rising debt in Greece, Portugal and other weaker states in the euro zone could undermine the global recovery’. It seems that the ECB is about to give the EUR a shove.

The USD$ is currently lower against the EUR +0.42%, GBP +0.09%, CHF +0.21% and higher against the JPY -0.28%. The commodity currencies are stronger this morning, CAD +0.49% and AUD +0.72%. Yesterday, watching the loonie was like watching paint dry. The CAD managed to climb from its lowest level since Nov. as an increase in crude prices boosted the demand for currencies related to commodities. Fundamental data from the CMHC revealed that Canadian housing starts rose to +186.3k in Jan. from a revised +176.1m, m/m. However, despite the positive fundamental prints over the last few trading sessions, the currency value is being dictated by investors risk aversion-risk reward appetite. Concerns that Greece and Portugal et al will continue to struggle to pare their budget deficits will again hurt growth and commodity currencies. As is historically done after NFP, the first trading session tends to be a non-event with minimal liquidity and participation. Depending on equities and commodities, any CAD rally will have investors looking to sell some of their long positions.

The AUD dollar strengthened from near its four-month low’s vs. the greenback after the RBA’s Governor Stevens said ‘holding down interest rates (3.75%) for too long may help create asset bubbles’. Also aiding the currency in the O/N session was the Chinese bourses finally finding some traction and by default giving growth currencies a leg-up after four consecutive trading days of declines. Advancing Australasian bourses act as a stabilizer for the currency. Demand for the currency also rose as ECB’s Trichet left a central bank meeting in Sydney a day early, increasing speculation that policy makers will help Greece address its budget deficit. Last week, the RBA kept rates unchanged at 3.75%, establishing a wait and see policy, as they wait to experience the true impact of the earlier hikes. Naturally, there remains a lofty rate premium built into the currency after three successive hikes (0.8734).

Crude is higher in the O/N session ($72.42 up +53c). Finally, yesterday the black-stuff crawled from its 7-week low as a weaker greenback restored some of commodities appeal for hedging inflation. Yesterday’s rally was driven by sentiment rather than fundamentals. OPEC’s Iranian governor, Ali Khatibi, indicated that global supply was sufficient to meet demand during the first half of this year. Currently, member states are responsible for supplying 40% of the worlds’ supply and are next meeting in the middle of Mar. to consider altering output targets. Global demand destruction remains healthy, diminishing the appetite for commodities on ‘skepticism that economic recovery will be sustained’. Last week, we witnessed a surprisingly large build in oil inventories in the EIA report. Crude stocks advanced +2.3m barrels, beating expectations for a little change, w/w. With the report showing a smaller build than the earlier API print (+4.7m), the data affirms the markets concern that the demand for energy is weakening as the US economic recovery remains tepid at best. Refineries continue to struggle with the problem of excess supply and too-little demand. They are operating at 77.8% of capacity, down from 78.5% last week, a loss of -0.8%, w/w. Gas stockpiles fell by -1.3m barrels to +228.1m vs. an expected +1m increase. Also in the declining boat was distillate stocks (heating oil and diesel fuel), they fell by -948k barrels to +156.5m vs. an expected decline of -800k. Again for a second consecutive time, the crude print was the only bullish component of the report. Look for better selling interest on upticks.

The wave of nausea from long positioned gold traders must be subsiding after yesterdays’ price action. The ‘yellow metal’ gained from a three-month low as a temporary halt in the dollar’s rally increased demand for the metal as an alternative investment. Analysts believe that the market was oversold with commodity prices managing to print, albeit, temporarily a 5-month low, had bottom feeders willing to take a chance on the commodity in a quiet trading session. With the dollar entrenched in an upward trend year-to-date should further pressurize the yellow metal. A percentage of dealers do not believe that the commodities downfall has run its course, even after two months of previous declines. Liquidation with a purpose will again have nervous investors seeking an early exit. With the EUR questionable and the dollar the ‘go-to’ currency for surety reasons, expect to see selling on upticks for the time being ($1,069), at least until the ECB say otherwise.

The Nikkei closed at 9,932 up +19. The DAX index in Europe was at 5,505 up +20; the FTSE (UK) currently is 5,115 up +23. The early call for the open of key US indices is higher. The US 10-year note backed up 2bp yesterday (3.60) and are little changed in the O/N session. Despite the US unemployment rate improving 3-ticks to 9.7% last week, treasuries across the curve remain on top of the five week low yields, on concerns that various European countries might default on their debt. Nervous investors continue to acquire the safety of US assets, but not with the same urgency. This week dealers will want to cheapen up the US curve ahead of the Treasuries funding requirements beginning with today’s three-year bonds. They will sell an equivalent to last Nov.’s record-tying $81b in product (3’s $40b, 10’s $25b and 30-years $16b). How much more concession is the market willing to give up to absorb the entire product?

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