EUs double dip squeeze for EURO

The EUR is failing to find support this morning as it encroaches on three year lows against the dollar. Germany’s political uncertainty is bad for the currency and bad for risky assets in the near term as it increases the indecision around potential future policy actions. Weaker manufacturing data out of Europe and China has risk aversion trading strategies being implemented, weakening both commodities and equities. The fear that Europe’s banks will have to write off more loans this year than last coupled with government efforts to reduce their deficits will probably impede the regions economic recovery even further. A ‘double dip’ potential is pushing the EUR towards 1.1800. Bears remain content.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Now that trading desks are back to being fully staffed after the long weekend we will have a plethora of data to get through this week before the grandfather of all fundamentals, US NFP on Friday. Today we have the US ISM manufacturing index, an index that has been steadily rising from its lows 18-months ago. As long as the trend remains intact and that the headline prints remains above 50 should again please the market. Downgrades remain on most people’s lips, last week it was Spain and expect the market to prepare itself for several more downgrades in the following weeks and months. Already this morning the EUR has managed to drop to its lowest level in three years vs. the dollar as European and Chinese manufacturing data is showing signs of slowing, thus affecting commodities and equities. Now that we sit on top of longer term EUR support levels, technically we can expect North America to try and push the currency lower this morning to see what support, if any, lies below.

The USD$ is higher against the EUR -0.84%, GBP -0.49%, CHF -0.61% and lower against JPY +0.33%. The commodity currencies are weaker this morning, CAD -0.41% and AUD -1.34%. After yesterday’s Canadian GDP print, where the Canadian economy doubled its neighbors 1st Q growth pace ( +0.6% m/m, +6.1% annualized), will make it very difficult for Governor Carney to ‘pass’ on being the first G7 country to hike rates this morning. It is the strongest growth pace in 11-years and stronger proof on how the Canadian economy is outperforming most of the industrialized world. It’s worth noting that the contributions by the various sub-sectors was again broadly based (consumer spending +1.1%, government spending on goods and services +0.5% and business investments +2%, etc). Analyst’s note that Canadian companies are ‘retooling’ and taking advantage of a stronger loonie for capital good purchases. The CAD has aggressively backed up from its six-month lows printed earlier last week as concern eased that Europe’s debt turmoil will worsen. With Canadian policy makers concerned about a potential bubble occurring in the housing market and a rising core-inflation only supports the case for normalizing rates. On the other hand, if there is no hike, a scenario that traders are not prepared for, the market should expect ‘hawkish’ rhetoric from policy makers. Depending on risk appetite and the BOC decision, one should expect some of the interest premium to be priced out on the currency’s initial move.

It was no surprise to see that the RBA left its O/N lending rate unchanged (4.50%) and signaled it may keep borrowing costs steady in the coming months as it assesses the impact of the most aggressive rate amongst the G20 members. The AUD did not lose support directly on the decision, but with global equity losses mounting, growth currencies have lost their supports as investors again seek risk aversion trading strategies. Plummeting equity markets in the region has pushed the currency lower against all its major trading partners. With China’s manufacturing expanding at a slower pace last month is again damping the demand for the currency. Speculators are better sellers on rallies as longer term support levels become questionable again (0.8289).

Crude is weaker in the O/N session ($72.16 down -181c). Crude prices crawled higher yesterday on market belief that US growth will fuel sustainable demand for the black stuff. Fears on the longevity of the US oil spill coupled with holiday gas consumption increasing, y/y, again provided a bid to the market. The question of the day was it sustainable? The O/N session proved it was not. Weaker European data is showing that European growth is questionable and US data last week revealed that consumer spending stalled this month, proof perhaps that US growth may be overstated. Prior to this morning, over the past three trading sessions oil had appreciated +5.8%, the most in nine month. On the flip side, the black stuff has fallen -16.2% from last month’s high print. Last week’s EIA report has helped the market to drag crude prices away from the oversold lows on European fiscal issues. A report released from the US Energy Department showed that the total fuel demand gained +0.6% to +19.7m barrels a day. The weekly EIA report revealed a +2.5m barrel increase in oil inventories vs. an expected +100k gain. On the flip side, gas stocks fell -200k barrels vs. an expected no change. Distillate inventories (including heating oil and diesel), fell -300k vs. an expected increase of the same amount. Interestingly, stocks at Cushing fell -300k barrels, the first loss in two months. Refinery utilization was down -0.1% to 87.8% of capacity, matching forecasts. Fundamentals are starting to provide a difference to commodity prices and not just the dollar pricing. Technical are showing that the market is currently overbought short term. Sellers are appearing on upticks.

Gold has found traction in the O/N session, on low volume and liquidity constraints, as the threat to global growth from Europe’s debt crisis and declining equity prices have heightened the demand for the commodity as a haven. With continued currency concerns and a market that is on ‘pins and needles’ is only boosting a case for owning the yellow metal. It’s surprising that the commodity price is not that much higher. Also lending support is that India’s gold import numbers have been stronger than the market has been calculating (+$6.9b vs. +0.71b, y/y) and surpassing China as the world’s largest user of the commodity. Longer term investors have been using the yellow metal as a ‘currency of last resort’ in addition to their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,224).

The Nikkei closed at 9,711 down -57. The DAX index in Europe was at 5,837 down -127; the FTSE (UK) currently is 5,076 down -112. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.28%) and a further 5bp in the O/N session (3.23%). Treasury yield remain under pressure, pushing the benchmark 10’s last month to briefly print an 18-month low on speculation that the EU efforts to contain Europe’s debt crisis will slow the global economic recovery. The 2/10’s spread continues to narrow (+252bp) on concerns that there maybe a shift in the trading philosophy from inflation to deflation.

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