EURO Buyer Beware

First hurdle completed. Now the market waits for the next Greek obstacle-the Greek government parliamentary vote on crucial austerity measures next week. The Socialists need to ‘ram’ through some Eur28b worth of stringent measures before receiving a Eur12b lifeline from the EU.

The peoples reaction, Greek citizens are emptying saving accounts and buying gold as they brace themselves for a sovereign default and a run on the banks. The populous continue to discount the Socialist party pledge of ‘save the country’. As longs as the Capital markets believe that Greece will pull through, the EUR will not plummet. If the situation gets so bad that the survival is at stake thats a different story.

Mind you, the IMF is diverting investors attention towards Spain this morning, insisting that they must step up efforts to overhaul their Economy, ‘the repair of the economy is incomplete and risks are considerable’.

The market now waits for Ben’s communique this afternoon. Will he hint towards a QE3 type stimulus or whatever it will be called one day? The market doubts it and expects his rhetoric to put some pressure on the dollar.

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

Not a disaster and not unexpected, US sales of previously occupied homes fell in May to its lowest level in six-months. Sales decreased -3.8% to a seasonally adjusted annual rate of +4.81m, the weakest showing since November yesterday. The median sales price was +$166.5k, down -4.6%, y/y. Some good news was the inventory of existing owned houses listed for sale. It fell slightly to +3.72m last month, representing a +9.3 month supply (down from +9.5 months). It seems that higher incomes and job growth is the only solution capable of eating through such large inventory levels. Proof of the housing market continuing to struggle will only detract further from US economic growth. The market has also to absorb the +1.8m distressed properties that continue to weigh down home values.

The dollar is higher against the EUR -0.12%, GBP -0.58%, CHF -0.08% and lower against JPY +0.03%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.01%.

With the market expecting a ‘yes’ confidence vote in Greece has allowed investors to strap on risk with the loonie one of the biggest gainers yesterday. Amid global equities and commodities rallying has also aided the currency, pushing it close to its weekly highs versus its largest trading partner. Even the disappointing retail sales data was unable to prevent the loonies’ flight. Retail sales rose +0.3% in April to a seasonally adjusted C$37.4b after a revised decline of -0.1% in March.

Previously, the loonie had slipped against its US counterpart, shredding all technical levels, weakening to its lowest level against the buck in three-months as renewed fears that Greece’s debt problems were out of control spurred a flight to safety. The CAD’s health is heavily linked to its southern economy because of the close trading relationship between the two countries. Yesterday’s intraday volatility moved on fumes, with most market participants happy to wait for the Greek vote.

On the crosses the currency has performed relatively well, boosted by this month’s employment numbers. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies (0.9732).

The Aussie remains on the soft side against most of its trading partners on prospects that Greece will struggle to pass austerity measures next week to avoid a default, damping demand for growth-sensitive currencies. Previously, it was the RBA’s board minutes for June reaffirming a noncommittal Central Bank that first applied the pressure. The market pricing for rate hikes over the next year has fallen 7bp to-6bp.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking.

The market is waiting for Bernanke’s communique before traders commit themselves to new strategies (1.0595).

Crude is lower in the O/N session ($93.82 -35c). Oil prices yesterday slumped to a four-month low on the back of weaker economic outlook and a European debt crisis will eventually curb fuel consumption. Analyst’s note, that from its peak this year, crude is off +20%. The technicals see strong support only appearing at around $87.

Prices are not been influenced by bearish weekly inventory data, but, rather by the negative economic news. With NY and Philly manufacturing contracting and European debt crisis deepening is expected to reduce economic growth and eventually fuel demand.

Last week’s EIA report showed that oil inventories fell -3.41m barrels to +365.6m. Stockpiles at Cushing were down -1.14m barrels at +37.76m (NYMEX delivery point). On the flip-side, gas stocks rose +573m barrels to +215.07m, below market expectations of a +1m barrel gain. A market surprise was distillates (heating oil and diesel) posting a dip of-105k barrels to +140.82m (-5.2%). The refinery utilization rate fell -1.1% to +86.1% of capacity, compared with analysts’ forecasts for a slight increase of +0.3%.

Big picture, the market believes that the US has ample crude stocks, allowing WTI prices to remain in check, while the Brent market continues to price in lost production of preferred sweet crude from Libya. Economic headlines are more important to the market right now than inventory levels.

Gold has again rallied as a weaker dollar and concern about Europe’s debt crisis spur demand for an alternative investment. The commodity ended last week better supported as currency volatility boosted demand for the precious metal as an alternative investment. Last week, the metal dropped -0.3% and this after falling -0.9% the previous week. Year-to-date, the commodity has climbed +7.3%.

Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required. The Euro-carnage will continue to support gold buying.

Support is also coming from the physical gold markets, especially Asia. Their demand for the commodity currently tops the last two-year similar period appetite. Last month alone, India’s demand grew +22%, m/m.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy commodities on these pullbacks ($1,547 +$1.30c). With the potentially dollar creeping higher, there may be better levels to own the commodity.

The Nikkei closed at 9,629 up+169. The DAX index in Europe was at 7,293 up+9; the FTSE (UK) currently is 5,771 down-4. The early call for the open of key US indices is lower. The US 10-year backed up 2bp yesterday (2.97%) and is little changed in the O/N session.

With a positive Greek confidence vote who would want to apply risk adverse trading strategies? Very few it seems as treasuries remain under pressure ahead of the FOMC meeting today. Market participants do not believe that the US economy is weak enough to justify yields that touched yearly lows last week and are happily steepening the US curve.

Policy makers are expected to leave the accommodative language unchanged and is not expected to do a new round of debt purchases under its so-called quantitative easing program. Bernanke’s post meeting communiqué this afternoon will enlighten the market of policy makers intentions.

The reality, record monetary stimulus is still needed to support US economic recovery. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates.

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