Greek ‘a la carte’ not for Trichet

Clarity of the ‘health bill’ tried pressurizing the dollar index or was it the pending SNB intervention? Not sure, but traders positions have been overextended in ‘long dollars’ and even this morning actions have investors comfortable with that. Markets hate uncertainties, hence the intraday volatility. It’s surprising that the EU disagreement is not providing more of the same. With the EU at odds on specifics and a timetable for a plan to aid Greece should promote the relative safety of US government debt. On a macro level, there is more pressure on EU countries to implement austerity measures that will keep interest rates low and provide further pressure on EUR. Unlike the Fed, who seems to be in a ‘semi comfortable position’? Trichet fighting for a united Europe will have the support of the ‘doves’. Bernanke’s commencing of a ‘tightening cycle’ is surely shorter than Europe’s? This is more ammo for a weaker EUR.

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

For the first time this week Capital Market get’s to chew on some US data, existing home sales. It has been an interesting week thus far, with the fall out of a surprising rate hike by India, EU’s domestic ‘cat-fighting’ and more public debates than the ‘original’ US health care warranted shaping market sentiment. Now that the Obama’s health care bill has finally made it through the House and the Senate, maybe we will see CNN give more airtime to ‘the’ administration calling for a ‘swift revaluation of the Chinese currency’. The Chinese Commerce Minister, Deming has said that ‘the currency is a sovereign issue and should not be an issue to be discussed between two countries. We think the Renminbi is not undervalued, but if the US treasury gave an untrue reply for its own needs, we will wait and see. If such a reply is followed by trade sanctions, I think we will not do ‘nothing’. We will also respond if this means litigation under the global legal framework. It’s probably not a good idea for ‘the’ administration to make their grievances public just yet. But they are pushing for it!

The USD$ is higher against the EUR -0.30%, GBP -0.28%, CHF -0.21 % and JPY -0.02%. The commodity currencies are weaker this morning, CAD -0.22% and AUD -0.27%. For a third consecutive day the loonie managed to pare some of its recent gains, as both equities and commodities found it difficult to decide what they wanted to do. The intraday volatile trading ranges in the majors is been pushed by weak s/l on both sides of the market. Initial risk aversion trading strategies dominated most of yesterday’s session. However, US Health Bill clarity managed to drag health and drug company’s equity prices higher, overshadowing the global concerns of higher interest rates and flight to surety. Fundamentally, after stellar reporting this month it’s difficult to continue to argue that ‘emergency’ rates in Canada are still warranted (+0.25%). Last week the currency attempted to flirt with parity and registered its strongest print in 20-months. The over saturated and one directional trade forced day traders to book profits. This reprieve or any reprieve will be seen as an opportunity to only add to longer term investors positions. The market now believes that there will be a forceful move on rates sooner rather than later. With the Fed ‘keeping’ low interest rates for an ‘extended’ period of time should support most growth currencies. Trader’s opinions have, up until now, varied on the timing of a hike. July Bax’s currently are pricing in a +98% chance of the BOC tightening, while some analysts are calling for a +50% hike. Despite the trend remaining your friend, the market should be looking for better levels to own the domestic currency.

Concerns that China will take additional steps to cool its economy have the potential to dampen demand for raw- material exports from Australia. This is exactly what is happening after the surprise Indian rate hike. The AUD has slid for a fourth-consecutive day as lower commodity and equity prices has pared demand for higher-yielding assets. With rumors that China is about to raise interest rates to prevent asset bubbles occurring has the AUD bulls trading cautiously. Prior to these rumors, it seemed the stars were lining up for a stronger AUD. Expectations for low interest rates in the US and Japan was fueling risk appetite. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9164).

Crude is lower in the O/N session ($81.21 down -21c). With the lack of US data for guidance yesterday, crude remains questionable, albeit in a volatile trading range. India’s surprising rate hike has investors wondering if other governments around the world will follow suite. This is heightening concerns of sustainable global growth. Technically the market remains optimistic, while fundamentally weak demand has us not so. In reality, US demand is better y/y, but we are still some ways from calling it as ‘tight’ demand. The bullish print last week was fuelled by the weaker than expected weekly inventory headlines. The report recorded a bigger than forecasted decline in supplies of gas and distillate fuels. Gas inventories fell -1.71m barrels to +227.3m last week vs. an expected decline of only -1.2m. Distillate supplies (which include heating oil and diesel) fared no better, decreasing -1.49m barrels to +148.1m. Stockpiles were forecasted to drop by -1.35m. On the flip side, inventories of crude rose +1.01m barrels to +344m. The market had anticipated an increase of +1.15m barrels, basically as expected. Other factors have also been raining on the ‘bears’ party. OPEC decided to keep its production limits unchanged ‘amid signs that a worldwide glut of crude is disappearing along with the recession’. Various analysts’ reports are now predicting that ‘demand for oil will recover this year, requiring additional supply’. Technical analysts have not been dissuaded from achieving their $90 a barrel by year end. For now, the dollar’s rise is providing a commodity price ‘headwind’. Natural dollar resistance may restore some equilibrium.

With a vengeance, the bears kicked back over the last couple of trading sessions. Gold has plummeted since the end of last week, causing havoc to technical charts. Of course, the dollar has been a factor for the commodities demise and so too has India. That country alone is the largest consumer of gold and with short term rates being hiked last Friday, the market now sees short-term paper competing with gold for investment. Russia continues to add the commodity to its reserves. Last month, they added another +6.2 tonnes of the ‘yellow metal’. On paper, investors could take this as support for the commodity. However, some of the strong support factor may be diluted as gold was ‘added’ by taking delivery from Russian mines and not purchased outright on the international market. Fundamentally it is expected that the commodity will find some traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. Analysts believe that with this ‘low rate environment combined with continued gold ETF interest and reduced Cbank sales’ should provide ‘strong’ support for gold over the next 18-months. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,103).

The Nikkei closed at 10,774 down -51. The DAX index in Europe was at 6,012 up +25; the FTSE (UK) currently is 5,682 up +38. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.67%) and is little changed in the O/N session. Treasury prices stayed close to home despite ‘the strong’ fundamental data of last week. The longer term trade is for a flatter curve (+270bp) and higher short term rates (0.25%), however, once the auctions are over this week, the market will again start to focus on the end of MBS buying by the Fed and the next set of auctions (long-end). Investors should not be surprised to see the 2’s/10s spread back up a wee bit from here. Bond traders, to date, have been unwinding ‘steepener’ positions and putting on flatteners as the Fed is ‘still willing to err on the side of keeping rates low’. This week’s refunding requirements is expected to put further pressure on the curve as both traders and investors prepare to take down $118b worth of product (2’s $44b, 5’s $42b and 7’s $32b). Look for better levels to own product.

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