EU’s stoic stance is a market positive for the EUR

We are back. With Chinese New Year and US president’s day out of the way, North America is prepared to take a swing at Europe’s attempts of sugar coating ‘their situation’. Demanding Greece to make deeper cuts while imposing ‘murky’ financial restrictions is helping no one. Is the EU trying to set Greece adrift? Tensions between the two entities are strained. The Greek finance minister said that they ‘are trying to change the course of the Titanic, and it cannot be done in a day. Greece is being pushed over the edge. We are in a terrible mess’. Is seems that the EU has had enough of Athens creative accounting reporting. Their stoic stance should be viewed as a market positive for the EUR. By day’s end, this mess will require a temporary direct payment from other members, coupled with the suspension of several of the Maastricht criteria’s. How much has the EUR priced all this in? Or is it overpriced? Perhaps we are dealing with a house of cards, where we move from Greece to Iberia?

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 ‘whippy’ trading range.

First day back after a long w/d one always seems discombobulated. Some price movements make sense while others we give up trying to understand. However, in the next 24-hours we will not feel as alienated. Forgot the micro-movements, the big picture remains the same. In Europe we have Greece, who is next? Australasia, strong Aussi fundamentals bring rate hikes back on the table. Japan continues to be fixated with deflation. China implementing slower growth measures and commodities finds footing with stronger corporate earnings. Now, two minutes later, one is less disorientated. Let the week begin!

The USD$ is currently lower against the EUR +0.48%, GBP +0.31%, CHF +0.40% and the JPY +0.08%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +0.61%. For a third consecutive day and the longest winning streak in 5-week’s yesterday, the loonie experienced ‘one way traffic’ as speculators coveted growth currencies on the tentative support by EU officials for Greece. Technically any positive news from Europe had risk appetite returning to the market. On a cross related basis, the currency has certainly outperformed most of its other G7 members. One gets the feeling that the domestic currency may be overbought, despite commodities also advancing. On Friday, it was the strongest performing currency and the intraday technical charts indicate that there is strong support for the greenback at we approach ‘parity’. Despite some of the European uncertainty being lifted, a definitive proposal for Greece will probably endorse some domestic currency profit taking. The old adage of ‘buy the rumor sell the fact’ tends to be a good percentage bet. For now being a contrarian costs.

The AUD rallied to its strongest point this month O/N after the RBA said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). The currency happened to gain for a second consecutive day after Governor Stevens said in last meeting that ‘their decision to keep borrowing costs on hold was finely balanced as they needed time to monitor events overseas’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike as early as next month. So far, the futures market is pricing in a 40% chance of a hike during the Mar. meeting. Also aiding the currency last night was the NAB confidence index rising 7 points to 15, the industry report showed business confidence rebounded following the RBA decision to keep rates on hold. On pull backs, expect better buying of the currency (0.8947).

Crude is higher in the O/N session ($74.85 up +72c). Crude prices remain little changed after last weeks larger than expected weekly EIA headline print and reports that China has taken further steps to cool its economy continue to support demand destruction. On Friday, China ordered banks to increase their reserve requirements for the second time this month. Despite signs that Japans economic growth is accelerating, European’s weaker GDP numbers last week will offset Japanese gains in the short term. The EIA report was delayed for two days due to the adverse winter conditions along the US eastern sea board. Finally introduced, the report showed crude supplies climbing +2.42m barrels to +331.4m (the highest level in 2-months) vs. an anticipated inventory rise of +1.6m barrels. The gas sub-category increased +2.32m barrels to +230.4m, w/w. In contrast, distillate stockpiles (heating oil and diesel fuel) lost -356k barrels to +156.2m vs. an expected drop of -1.55m barrels that was forecasted. With industrial demand remaining weak, it continues not to have any impact on excess crude supplies. For the time being, expect speculators to be better sellers on upticks.

Yesterday, the yellow metal found another gear, climbing the most in over a week as concern about Greece’s debt burden fueled speculation that the global economic recovery might falter. Investors continue to seek an alternative to holding EUR’s on concerns that the Greek budget deficits woes may widen. Last week we saw that stronger fundamentals out of both Australia and China gave commodities a leg up from just above the month’s low, while a brokered European accord, short on details, has had nervous investors seeking security in the asset class. Where too from here? That depends on the convictions of one’s own risk tolerance. With the positive Australasian outlook and the remaining sovereign debt questions, one should expect better buying on dips to remain in play for the time being ($1,114).

The Nikkei closed at 10,034 up +21. The DAX index in Europe was at 5,575 up +64; the FTSE (UK) currently is 5,223 up +56. The early call for the open of key US indices is higher. The US 10-year note eased up 1bp on Friday (3.69) and are little changed in the O/N session. Last week was the first losing week this year for 10-year notes as a record tying $81b’s worth of product coupled with Europe’s semi-pledge to help Greece dissuaded investors from seeking the safe heaven nature of US’s FI. A tad confusing really, as the European stance in respect to Greece seems somewhat unnerving for capital markets. Traders certainly had the best of excuses to cheapen up the curve, the US long bond or 30-year treasuries touched a four-week high as a record-tying $16b auction on Thursday yielded lower-than-average demand. All three of last week’s issues came with a ‘larger than expected tail’. With the lack of ‘specificity about the true nature of the determined and coordinated action pledged’ should be a good enough reason to want to own some of the safe heaven product on these deeper pull backs.

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