Greece will test the EURO even with a rescue package

There are rumors that the EU is working towards a package to help Greece avoid ‘the contagion’ spreading out to the rest of the European Union and the EUR. Germany and France are considering a plan, with a bail out costing in excess of 30 billion EUR’s. The plan would involve the sale of Greek bonds to French and German organizations. What is not clear is the timing. What about the EUR? It could be a positive until a ‘solution’ to the problem is found. Or on the other hand, it could do a lot of damage for the currency. What ever happens, the EUR is being severely tested. There is only one question, will it survive?

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Most of the trading on Friday was month-end rebalancing, pushed around mostly by screen watching as liquidity was low, partially due to the weather. US GDP have investors with their fingers once again on the ‘risk on button’, growth and higher yielding currencies are beginning to perform. This is a big week for numbers ending in Fridays NFP data which could be another eye opener. Capital markets will most definitely be taking directions from the EU as the budget deficits lay in their court.

The USD$ is currently is higher against the EUR -0.14%, GBP -0.24%, CHF -0.18% and higher against JPY -0.48%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.10%. The loonie is a growth sensitive currency and Friday’s data managed to push the ‘risk on’ again button for investors. Month-end rebalancing with CAD dollar demand also provided support for the currency that continues to trade in a well defined range. The currency ended up rallying +1.8% in Feb. as oil, one of its largest export commodities, rallied +7%. On Friday, fundamental data showed that the Canadian current account deficit was narrowing (-9.8b vs. -13.8b), a small enough reason to buy the domestic currency, temporarily at least, as the market had expected a greater narrowing. The loonie remains contained in its tight 4c trading range. A renewed demand for the USD for surety reason will threaten the range and possible open up an assault, technically at least, on this year’s currency low. Until the market sees some positive assurance on European sovereignty debt woes, sub-consciously, the dollar feels a safer bet. Expect better USD buying on pull backs.

Will they or won’t that? They have surprised all of the last time out, the RBA. In the O/N session, the AUD has managed to advance against 14 of its 16 closest trading partners ahead of tonight’s anticipated rate hike by the RBA to 4.00%. Last month was the first monthly gain against the USD since Nov. after reports showed that lending rose in Jan. and business investment rebounded in the 4th Q. The currency was understandably under pressure as Greek concerns reversed investor risk appetite. Governor Stevens and his policy makers have been rather vocal about this rate announcement. They said that further ‘increases to the benchmark interest rate are likely if the economy improves’ (3.75%). It’s difficult to bet against the currency. According to the RBA, ‘the economic situation is stronger than expected and it is natural for monetary tightening’ to take place currency. The currency declines have been tempered by Governor Stevens’ remarks that the Australia’s benchmark rate was below normal. He said borrowing costs for ‘businesses and households were still about 50 and 100 basis points below average’. The rhetoric looks like its giving the green light to Capital Markets to expect another hike. Let’s see what this evening brings us (0.8976).

Crude is higher in the O/N session ($80.42 up +76c). Oil rallied on Friday, just under +2%, as the preliminary US GDP report gained by the most in 6-years (+5.9%), beating all expectations. With month end portfolio rebalancing requirements and a market starving for liquidity, the black-stuff managed to make an assault on the $80 psychological resistance level. Is this sustainable? All depends on the dollar and investor’s appetite for risk. Are they convinced that fundamentals are turning the corner? With the dollar threatening to advance even further for surety reasons, the black stuff may come under renewed pressure. Last weeks EIA inventory report, on the face of it, was not that bullish for commodity sensitive currencies. A rise in imports managed to push the stockpiles higher while at the same time the US’s distillate inventories print fell. Also surprising was that gas managed to retreat too. Crude stocks increased by +3m barrels to reach a total +337.5m, w/w. The EIA supplies were forecasted to increase by +1.9m barrels. Digging deeper, imports of the black-stuff has continued its recent upward trend, rising +536k barrels, w/w. In contrast, distillate stocks (heating oil and diesel) declined by -600k barrels to +152.7m. It’s worth noting that refineries were running at +81.2% of capacity, up +1.4% vs. an expected ‘no change’. Risk aversion trading strategies and employment fears should continue to price out any speculative element. For market direction, we are now depending on equities and investors ‘on’ again ‘off’ again risk appetite.

The ‘yellow metal’ ended last week on a high note, pushing prices higher to print the first monthly gain since Nov. Weaker US data tried on a number of occasions last week to push the commodity lower, to test the monthly support lows. However, gold advanced on speculation that concern over Greece’s debt will increase demand for bullion as an alternative to holding currency. For most of last month, a stronger greenback had curbed the demand for commodities, but it’s the big picture concerns about deepening EU deficits becoming contagious that is supporting the yellow metal on ‘much deeper’ pull backs. Various think tanks believe that with the sovereign-debt problems, in the end, gold will be the only hard asset speculators will want, the ‘ultimate currency’ ($1,121).

The Nikkei closed at 10,172 up +46. The DAX index in Europe was at 5,674 up +76; the FTSE (UK) currently is 5,386 up +32. The early call for the open of key US indices is higher. The US 10-year eased another 2bp on Friday (3.63) and is little changed in the O/N session. The ‘dovish’ Fed comments last week have managed to push the US yield curve lower. Treasuries advanced as weaker than expected economic data and the threat of credit-rating downgrades for Greece encouraged the demand for the safety of US government debt. The theme again is ‘flight to quality’, no matter how much government debt needs to be issued. European uncertainty has been increasing the risk aversion trading appetites. Look for better buying on pull backs, even if the product looks expensive on the curve.

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