EURO clearance for take off?

The EUR is nudging higher in light trade with support from improved risk appetite as the Euro peripheral yields hold steady and equities inch out a small gain this morning. It seems that the market is unwilling to make any ‘bold moves’ until we get further clarity from Dublin on the Irish debt crisis. At the same time, inventors remain wary about China. They are trying to detect any signals of tightening monetary policy from the PBOC. Market consensus seems to be assuming that with another ‘Band-Aid‘ in place for the Irish situation, the EUR has clearance to take off back to 1.40, as the data, technicals and liquidity seem supportive for the currency. ‘Too make cooks spoil the broth’.

The US$ is weaker in the O/N trading session. Currently, it is lower against 14 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Stronger US data of late maintained its momentum yesterday. Weekly US unemployment claims inched higher by +2k to +439k vs. market expectations of +440k. In retrospect, the reading appears to affirm that the downward trend ‘is on’, and that demand for labor is beginning to firm ever so slightly after flat lining for the past twelve months. We have now witnessed five double-digit weeks of declines since early September, pulling the four week moving average down to +443k, the lowest level in twenty-four months. Continuous claims fell-48k to +4.295m, the fourth consecutive lower print, and the lowest in two-years. The percentage of eligible claimants receiving UI eased a tick to +3.4%. Other details showed that the emergency unemployment compensation program saw an increase of +67k to +3.967m, similar to the +54k rise of extended benefit claimants (+966k). The downward trend would support the theory that the hiring rate may have increased lately.

The Philly Fed index blew everyone’s expectations out of the water yesterday, rising +21.5 point jump to the 22.5 Novembers’ print. It is the strongest reading in nearly twelve months and is in stark contrast to this weeks Empire index, which happened to report a sharp decline earlier in the week. It reaffirms that the stronger manufacturing story may be back on track. Digging deeper, the new order index rose from-5 to +10.4, shipments advanced from +1.4 to +16.8, inventories rose from -18.6 to -5.9. Prices paid inched higher from +31.5 to +34 and prices received rose from-9 to -2.1 and finally the employment index was a pleasant surprise, rising from +2.4 to +13.3. The dynamically contrasting reading of both the regional reports emphasis’s the volatility in nature. That being said, market sentiment is leaning towards the upswing.

Finally, the US conference’s boards October’s leading indicators came in bang on expectations at +0.05%, while the September print was revised higher to +0.5% from +0.3%. It’s interesting to note that both the Capital goods (volatile aircrafts) and the manufacturing workweek contributed to the revisions. However, the new firm favorite for contribution, for the past two months, has been the financial sector. This has occurred mostly on the back of QE2 being priced in.

The USD$ is lower against the EUR +0.36%, GBP +0.20%, CHF +0.60% and JPY +0.28%. The commodity currencies are mixed this morning, CAD +0.11% and AUD -0.25%. The loonie has advanced from its monthly lows print yesterday as speculation the debt crisis in Ireland will be contained has sent global equities and commodities including crude oil higher. Canada’s stronger that expected wholesale trade and leading indicators capped the dollars climb vs. its largest trading partner, for the time being at least. Headline (nominal) wholesale trade advanced +0.4%, m/m, its second straight month of gains, although at a slower clip. In volume terms, wholesale trade was up +0.3%. The leading indicator advanced +0.2% last month, led by stock market gains, after a revised -0.2% September decline. Like any commodity and growth sensitive currency, market increased risk-appetite favors the loonie. The net foreign security purchase print and provincial bond’s tightening to Canada’s continues to provide stronger support for the currency. The loonie had been under pressure most of this week on fears of further emerging market tightening rumors. Do not be surprised to see China to step up to the plate this weekend. At the moment, the market is tentatively happy buying the loonie on dollar rallies.

Speculation that Ireland will eventually accept and revive demand for higher-yielding assets was trumped by Chinese concerns that tightening monetary policy would have a negative effect on growth currencies. As the leading commodity currency, the AUD is highly vulnerable to growing speculation that the PBOC will introduce new measures to curb inflation and slow the Asian economy. It’s anticipated that China will hike rates by the end of December, even rumors as early as this weekend. Despite depreciating vs. all its 16 trading partners, the declines have been somewhat limited after a government report earlier this week revealed that wages rose in the third quarter by the most in almost two years (+1.1%) and that the RBA minutes indicated that Governor Stevens decision to raise interest rates was ‘finely balanced’. Policy makers said a ‘modest tightening’ was considered prudent when they increased the benchmark rate earlier this month (+4.75%). Market players are viewing corrective rebounds as fresh selling opportunities short term on the back of the Asian growth variable (0.9872).

Crude is higher in the O/N session ($82.48 +63c). Oil prices have rebounded aggressively from this week’s lows after a surprisingly weak EIA report number has finally kicked in and on the back of increased risk appetite. The commodity has been under pressure on concerns that a Euro-zone’s deepening debt crisis coupled with emerging markets Cbanks tightening monetary policy would reduce demand for the asset class. The market remains on tender hooks, fearing that China may also attempt to rein in inflation, further reducing demand. However, this week’s inventory numbers are more bullish than what the market is giving them credit for. Crude stocks fell by -7.3m barrels last week, the largest weekly decline in 15-months. The market had been expecting a small decline of -100k barrels. Not to be outdone, the other fuel categories also declined. Gas inventories were down -2.7m barrels, while distillates (heating oil and diesel) fell by -1.1m. The market had expected a decline of -600k and -2.2m barrels respectively. Despite the negative readings, the US continues to experience a ‘large supply glut’, with crude and fuel inventories above five-year average levels. In September inventory levels happened to print a 27-year high, and have been declining ever since. The ‘big’ dollars value will continue to influence prices despite the fundamentals. The oil market has lost -6.2% during the last five sessions. This week’s inventory numbers should be able to provide support ahead of the psychological $80 level.

Gold prices have found their second wind after experiencing its longest losing streak in six months earlier this week. With the dollar under pressure has boosted the demand for the commodity as an alternative investment. Investors are back in the saddle using the commodity as a hedge against inflation and store of value. The fear that emerging markets are beginning to tighten their monetary policy could curb the demand for the commodity as a safe-haven asset. For most of this week a stronger greenback had restricted the demand for bullion, with gold usually trading inversely to the dollar. Speculators are expecting European debt concerns to eventually provide more support on these pullbacks, as Capital Markets shift their focus toward sovereign debt issues and away from QE2 debates. Year-to-date, the metal is up + 23.1% and is poised to record its 10th consecutive annual gain. For most of this year, speculators have sought an alternative investment strategy to the weaker dollar and have been using the commodity as a proxy for a ‘third reservable currency’ ($1,359 +$6.20c).

The Nikkei closed at 10,022 up +9. The DAX index in Europe was at 6,829 down -2; the FTSE (UK) currently is 5,733 -35. The early call for the open of key US indices is lower. The US 10-years backed up 2bp yesterday (2.89%) and is little changed in the O/N session. Stronger US data, leading indicators rising for a fourth consecutive month, manufacturing surging and jobless claims climbing less than forecast, is signaling that the world’s largest economy is accelerating and which will only pressurizing treasury prices. The treasury department also released the size of next week’s auctions. As expected it will sell $99b of product ($35b-2’s, $35b-5s and $29b-7’s). Again expect dealers to make room to take down the supply. Bernanke’s comments about unemployment affecting growth is trying to flatten the curve.

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