EURO Squeeze Remains Intact

Are we to see additional consolidation in the FX market between now and Friday? Perhaps the EUR bulls will eke out further gains ahead of the ECB meeting on Thursday, with option barriers at 1.46 touted as their initial target when Trichet is expected to hike rates by +25bp.

The key to this months ECB meeting will be Trichet’s take on future interest rates. The rate market has not ‘fully priced’ an October hike, so any indication that policy makers are set on continuing at the same three-month pace of tightening could provide further support for the currency. At the time of the April hike, the ECB said it would continue to monitor developments relating to price risks very closely, strong vigilance rhetoric with a continued upside risk to inflation bias would be consistent with another hike in October.

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

The market digesting concerns about China overnight has put the EUR on the back foot this morning. There were rumors that the PBoC would raise interest rates as early as this weekend, after economists from two of China’s largest state banks forecasted further rate hikes this quarter. Compounding Asian pressure on the EUR was Moody’s issuing a report claiming that China’s local government debt is $540b larger than officially reported. This would have a negative implication for Chinese banks.

A positive for the currency, the ECB will continue to accept Greek debt as collateral for ‘loans’ as long as at least one of the major credit agencies (Moody’s, S&P and Fitch) does not put Greece into default. It’s the policy makers compromise on private sector involvement like the French plan for debt rollover. Even Ireland’s finance minister announcement that the country has met its target in the first review of the IMF/EU bailout package has given the currency little legs. If it cannot go up, it trades sideways!

The dollar is higher against the EUR -0.40% and JPY -0.39% and lower against GBP +0.03% and CHF +0.39%. The commodity currencies are weaker this morning, CAD -0.14% and AUD -0.34%.

Yesterday was US Independence Day and Canada seems to celebrate it, afraid of dictating its own currency market without its largest trading partner not being around. The loonie managed to weaken outright, during the illiquid trading session, as traders speculated that the recent advance was overdone. Over the past week, the CAD had appreciated +3%, breaking through some key support levels. Investors have been booking some modest profit, trimming holdings of riskier assets after S&P’s said a debt-rollover plan for Greece may prompt a ‘selective default’ rating for the country.

Canadian inflation data last week, despite it been seen as a total ‘head-fake’ by some analysts (+0.7% vs. +0.3%), has investors pricing in a BoC hike for October and the reason they pushed the currency to a monthly high, aided by rising oil prices. Expect the loonie to be subjected to the pull of either risk or risk aversion trading strategies ahead of North American employment data on Friday. The currency is vulnerable with US data likely to print weak into mid-July (0.9620).

With the RBA leaving rates unchanged in the O/N session has put some pressure on the currency. The July policy statement provided little that was new from the previous statement, except perhaps making it clearer that uncertainty over the outlook for the global economy is a key reason for its shift to a ‘less aggressive’ posture than in May. Governor Stevens communique certainly acknowledges that elements of domestic demand have weakened and that policy makers warned that GDP growth is likely to be below its previous forecast.

However, the market believes that the statement still retained a hawkish rather than dovish bias. Policy makers continued to note that wage growth has risen, that underlying inflation will gradually rise and the retention of that last sentence about ‘assess carefully the evolving outlook’ at future meetings. Perhaps the market will think again about pricing in a rate cut at its December meeting. Policy makers are more likely to return to a bias of higher rates later this year as global growth reaccelerates. Investors are looking to be better buyers on dips (1.0690).

Crude is lower in the O/N session ($94.83 -0.11c). Crude prices were relatively steady yesterday, remaining within sight of last weeks close, on the back of the US Independence Day, despite news of negotiation between the Libyan government and rebels and Greece’s debt concerns.

WTI crude slumped-11% last quarter, as Greece’s debt crisis fueled concerns that Europe’s economic recovery might be stalled. EU officials agreed on the weekend to make the expected payout after Greece’s parliament passed new austerity measures. Euro-zone finance chiefs gather next week to tackle the country’s long-term lifeline.

Providing crude support, after the IEA said members would release +60m barrels from strategic reserves over 30 days to make up for a supply shortfall in Libya, was Goldman Sacs cutting its estimate for the potential price affect of the release, because the actual amount sold may only be about +39m barrels, as some member countries plan to only reduce inventory requirements for refiners.

The market is concerned that the ‘tightness’ in the oil market will continue to undermine the fragile global economic recovery. This is the reason the IEA and its members agreed to release crude from their SPR’s to ease some of this market tension. According to analysts, this supply move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’.

This year’s energy spike is being cited ‘as the reason for the global economic slowdown. Analyst’s note, that from its peak, crude is off-20% and from the IEA announcement down -4.3%. The technicals see strong support first appearing at around $87.

Gold regained some its lost territory from last Friday’s fall yesterday, gaining ground in thin markets supported by an easing concern about Greece’s debt crisis has diminished the commodity’s appeal as a safe haven in the short term.

After Greece passed its austerity measures, market participants will need to find another reason to buy into the bullish gold trade story in the short-term. Longer term, weaker fundamentals are expected to support this crowded trade during the second half of the year. It’s hard to find a catalyst for gold prices to push higher just now. The yellow metal is likely to be range-bound between its long term strong support level of $1,470 and $1,520 ahead of this Friday’s NFP.

The commodities dependency on the buck and the outlook for US rates is likely to remain a supporting factor. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks until proven wrong ($1,497 +$14.80c). Technical analyst’s see $1,470 as the first level of ‘real’ support.

The Nikkei closed at 9,972 up+7. The DAX index in Europe was at 7,452 up+10; the FTSE (UK) currently is 6,024 up+7. The early call for the open of key US indices is lower. The US 10-year backed up 11bp on Thursday and Friday last week (3.15%) and is little changed in the O/N session.

The short end of the US curve finally snapped their longest winning streak in nearly 30-years after the Greek parliament reduced the risk of default by implementing austerity measures and after EU officials approved an aid payment to the country, to prevent a default. Analysts believe we are now approaching ‘yield levels’ that are more justifiable.

Last week’s US Treasury offerings of $99b in notes drew ‘very poor demand’ as the Fed carried out the final debt purchases under its $600b second round of quantitative easing. The market expects yields to remain elevated ahead of this Friday’s NFP release, which is expected to show employers added more jobs last month.

With the Greek flight-to-quality bid easing up somewhat and better than expected economic data in the US last week, should be able to put further pressure on benchmark product. First signs of strong demand appear around 3.50% in ten’s.

The jump in yield spreads between 2-year US and Japanese bonds (31.5bp) has been partially responsible for pushing USD/JPY up into the large resting offers of 81, temporarily at least.

Content is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Business Information & Services, Inc. or any of its affiliates, subsidiaries, officers or directors. If you would like to reproduce or redistribute any of the content found on MarketPulse, an award winning forex, commodities and global indices analysis and news site service produced by OANDA Business Information & Services, Inc., please access the RSS feed or contact us at info@marketpulse.com. Visit https://www.marketpulse.com/ to find out more about the beat of the global markets. © 2023 OANDA Business Information & Services Inc.