EURO continues to Bleed

Despite global risk sentiment tentatively rising, the EUR continues to try to fend off the negatives and its losing ‘this’ battle. The bears are holding that winning grip. This morning, we have a litany of new reasons to want to sell the EUR on any rallies. The market continues to react to the Weber departure, a hawk, from the ECB race. In Irish politics, Fine Gael, Ireland’s opposition party and most likely next Government, want senior bond holders to take a haircut. This smells of default. There are rumors that WestLb negotiations are breaking down, that certainly will not help the European banking industry. The Euro-zone December industrial output disappointed this morning at -0.1%. With peripheral issues again appearing on the radar it’s going to be difficult for the EUR to maintain any traction short term especially as we approach Euro-zone refunding.

The US$ is weaker the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in a ‘subdued’ O/N session.

Friday’s US data certainly provided the excuse to want to own some dollars, despite the US Trade deficit widening. The dollar value of the deficit came in line with expectations, widening to -$40.6b in December. Digging deeper, the details were broadly stronger, with petroleum accounting for most of the widening. It accounted for three-quarters of the expansion. Exports continued to climb for the fourth consecutive month, up +1.8% and are at the highest level in 30-months. Imports were up +2.6%, the most since June. However, higher energy prices and volumes accounted for most of that rebound. The ‘real’ trade deficit widened to $46.023b, its widest level since September. It’s this figure that matters to GDP, and carries modest negative implications for the 4th-quarter. The widening was caused by higher petroleum import volumes, as the real ex-oil trade gap shrank by -8.5% to $31.218b, supported by a sharp +3.3% gain in non-petroleum export volumes, while non-petroleum import volumes remained virtually flat. The ‘real’ trade deficit in 4th-quarter narrowed by -8.8%, the biggest contraction since mid-2009.

Finally, US’s Prelim UoM Consumer Sentiment advanced to 75.1, an eight-month high on Friday. It’s probably a sign that falling US unemployment and rising equity prices may be comforting consumers. The consumer has been Bernanke go to variable and it seems that the tide may be turning in the Fed’s favor, only on the confidence meter at least. Now, it’s back to the spending drawing board.

The USD$ is higher against the EUR -0.69%, and lower against GBP +0.05%, CHF +0.05% and JPY +0.07%. The commodity currencies are stronger this morning, CAD +0.02% and AUD +0.02%. Canada unexpectedly posted its first trade surplus in 10-months in December on Friday, as energy and metals ‘powered the biggest jump in exports in almost three decades’. Exports jumped +9.7% to $37.8b, as energy shipments advanced +25% and industrial goods rose +7% to a record high. Imports rose +0.7% to $34.8b. The data happened to push the loonie higher against most of its major trading partners on speculation that Governor Carney will hike borrowing costs quicker than other Cbank. Swaps traders are pricing in that the BOC will raise its target lending rate by +0.83% over the next 12-months, up from +0.60% a week ago. The trade deficit was one of the last pieces of the puzzle for the BOC. Parity, the new paradigm, is becoming well adjusted too by investors, consumers and manufactures. With the Euro-peripheries back in the picture we may be back to less risk more safe heaven, until then, expect CAD to outperform on the non-U.S. dollar crosses. Against the dollar, better sellers have appeared on dollar rallies (0.9875).

In the O/N session, the AUD has advanced against most of its major counterparts after government data showed home loans climbed more than economists forecast (+2.1% vs. +1%). The demand for higher-yielding assets, like the AUD, was also boosted by gains by the Asian bourses. The markets is also expecting that the inflation report out of China tomorrow will be less than expected. Investors are happy to take on risk as futures traders continue to bet that the currency will advance vs. the dollar outright. Last week, the market pricing for rate hikes over the next 12-months fell-4bp to +34bp. Analysts note that with futures dealers interpretation, combined with such a clear message from Stevens, still leaves the rates market vulnerable to the weaker data on lending and consumption over the next few months. Investors do not expect the RBA to turn outright dovish, as dealers continue to price in rate hikes later this year. Last week, the AUD reacted negatively to a mixed domestic employment report and a Chinese rate hike, reasons that forced the liquidation of the weak long carry trades who had been influenced by the market pricing for RBA rate hikes. With risk appetite on the up and depending on China’s CPI release, carry trades will be slowly acquired again(1.0015).

Crude is lower in the O/N session ($85.25 -0.34c). The insurance premium is and has been priced out. The Egyptian military is promising a transition to democracy ‘soon’ and indicated that the country will honor its peace treaty with Israel now that Mubarak has ‘resigned’. The market has been concerned with the continued uncertainty about Egypt and fear that crude supplies from the Middle East may be disrupted. Analysts note that approximately +3.5% of global oil output moves through Egypt by way of the Suez Canal and the Suez-Mediterranean Pipeline. The value of the Yuan is also aiding commodity prices. After reaching a 17-year high vs. the dollar it is making it much cheaper for them to acquire ‘their’ coveted commodities. Last weeks EIA report revealed no surprises. Both crude and gas stocks happened to edge higher. Oil inventories increased by +1.9m barrels to +345.1m and analysts note that stocks remain above the upper limit of the average range for this time of year. It was a similar story with gas. Inventories moved up by +4.7m barrels after increasing by +6.2m in the prior week, and are above the upper limit of the average range. Crude imports averaged +8.9m bpd last week, down by-105k per day. Over the last four weeks imports have averaged +9.1m bpd, which were +783k barrels above the same four-week period last year. Distillate stocks rose +288k barrels to +164.3m, compared with projections for a +1.2m draw. Refinery utilization rose +0.2% to 84.7%. Fundamentally there is far more oil in storage, more fuel capacity and more idle oil wells to limit a much stronger market rally. It has been the fear of a reduction of supply that has weighed heavily on the commodities. Through $85, then $80 will be the markets new target.

Gold ended the week lower on Friday after Mubarak resigned and with the dollar strengthening. This took away some of the yellow metals safe-haven appeal. A stronger dollar is negative for the asset class, as it makes it more expensive to foreigners. The commodity that every investor hated last month has found strong support on last weeks pull back. Prices have climbed to a three-week high on demand for a hedge against rising consumer prices after China increased borrowing costs on expectations that their inflation has expanded at the fastest pace in two and half years. The commodity is being used as a store of value. Last year the commodity appreciated +30%. So far this year, natural physical buying has been less than modest with the commodity off to its worst start in 14-years. Has the commodity peaked or is it simply a short-term correction? The commodity is attracting technical buyers after rallying above its 20-day moving average. On deeper pullbacks, the metal should remain better bid on speculation that currency volatility will boost demand for a safe heaven investment once the Euro contagion fears raise its ugly head again over the coming weeks during the Euro-periphery refunding season ($1,358 -$1.70c)

The Nikkei closed at 10,725 up+119. The DAX index in Europe was at 7,399 up+28; the FTSE (UK) currently is 6,066 up+4. The early call for the open of key US indices is higher. Treasuries last week fell, with 10-year notes touching the highest yield in 10-months, as the US sold $72b of debt amid data showing that the economy is gathering steam.The US weekly claims fell to their lowest level in 30-months and with data this week to show that US January retail sales and housing starts growing will continue to provide outside pressure on prices. Investors look to economic reports for more confirmation of the global recovery with the bias towards higher rates. With some small clarity on the Egyptian crisis, bond prices will find it difficult to maintain its bid. These higher yields continue to support the dollar.

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