Greeks refunding an eyesore for the EUR

Greek self-refunding continues to dominate Capital Markets. This morning’s Greek T-bill auction was handsomely over subscribed causing the EUR to actually spike for a brief period. A poor result would have ‘painfully hurt’. The post auction-psyche has been met with a ‘shrug amongst investors’. Is the market taking the view that the Greeks are unable to bring longer term debt to the market? Are they afraid that there truly is no demand? Issuing T-bills is a very short term fix, if we can call it that. Thus far the forex market is pretty much undecided. It is caught between short-term relief and long-term concern in regards to the ‘their’ issues. There is also a question mark in regards to the positioning situation. How many of the short positions have been wiped out on the weekend’s move to Sunday session highs and how many short positions are left? It was no wonder that yesterday we were suffering from post Masters blues while watching paint dry. Refunding results could be a different matter as North America digests them.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘whippy’ trading range.

If we do not ask we will never know. President Obama continues to urge China to move toward a ‘more market-oriented exchange rate’ and President Hu in response said that the country would not yield to ‘external pressure’ in deciding when to adjust the Yuan. Any currency revaluation by China must be ‘based on its own economic and social-development needs’. This is all the required public beating of the ‘chests’ ahead of nuclear talks between both countries. However, by saying China would adjust exchange rates based on its own needs Hu has left the matter ‘wide open’. Traders are actually betting that China may allow the Yuan to appreciate by June 30 to curb inflation while avoiding ‘a one-time jump in value that might curb exports’. It sounds like the beginning of ‘the summer of discontent’.

The USD$ is lower against the EUR +0.09%, CHF +0.16% and JPY +0.01% and higher against GBP -0.09%. The commodity currencies are weaker this morning, CAD -0.11% and AUD -0.26%. The EUR relief rally initially hurt the CAD by default, but it also provided an opportunity for longer term speculators to add to their positions. The loonie garnered support from various sources yesterday. Despite not matching expectations, Canadian housing starts (+197k vs. +201k) continue to maintain their upward trend. The BOC quarterly Business Outlook Survey showed that +64% of executives said sales growth will quicken over the next year, this is providing further evidence that the recovery is taking hold. Canadian fundamentals, similar to Australia have been hitting it out of the park when compared to other economies. Unlike the RBA, the BOC seems to be behind the blackball when it comes to their lending rate adjustments. Already this month we have witnessed Governor Carney and co. underestimating their prediction for Canadian economic growth. The Canadian Finance Minister’s comment that the loonie appreciation to parity has been orderly shows that the Harper government is comfortable with the currency’s value. Canada seems to have adjusted appropriately to these levels after its two-year hiatus from last achieving parity. Year-to-date the loonie has appreciated just over +5% and everything the global economies want, Canada has it. Futures traders are pricing in a rate hike sooner than official rhetoric is suggesting. USD rallies remain shallow and are met with strong resistance. The trend remains your friend.

Last night the Australian business confidence index last month held close to its highest print in almost eight years (16 vs. 19), as companies reported a surge in forward orders that suggests the economy is weathering the higher RBA borrowing costs. Again in the O/N session, the AUD was the second worst performer amongst the 16-most traded currencies for a second consecutive day. It fell, erasing earlier gains, as rhetoric from the assistant governor from the RBA said that benchmark rate was ‘not far’ from average levels. This provided the impetus for the currency to fall on prospects that Governor Stevens will curb future interest-rate increases on signs the economy is slowing. It was only last week that the RBA was really hawkish when they raised the interest rate, but the market is looking for fewer hikes from here, which is triggering a little bit of profit taking in the AUD. Bigger picture, fundamental data is very strong and the RBA still require a gradual tightening process to bring borrowing costs ‘closer to average’. Analysts expect the Cbank to raise their policy rate up to +5.0% in the 1st Q of next year. In last week’s Cbank communiqué, ‘interest rates to most borrowers nonetheless have been somewhat lower than average’, and ‘with growth likely to be around trend and inflation close to target over the coming year, it is appropriate for interest rates to be closer to average’. The market tentatively expects the AUD to remain better bid on any pull backs (0.9250).

Crude is lower in the O/N session ($83.55 down -79c). Crude prices fluctuated around last week’s closing price as the dollar struggled. The dollar weakness had temporarily made commodities an attractive alternative despite concerns that sustainable global demand is an issue. This morning firming of the reserve currency is beginning to put pressure on the black stuff. Last week’s EIA report revealed that US plants operated at +84.5% of capacity (the highest level in 6-months). Speculators expect economic growth will continue and demand to increase. However, inventory levels are still somewhat elevated. If global demand does not pick up, then technically, the commodity is going to find it difficult to maintain traction. Last week supplies of crude rose +1.98m barrels to +356.2m, pushing inventories +7.1% higher than the 5-year average. In reality, commodity gains are a crowded trade. Investors should heed the warning signs, a weak dollar, robust equity prices and little demand for the ‘black-stuff’, is certainly a recipe for backwardation and making it difficult for technical analysts to achieve a $90 print in the short term.

Another 4-month high was printed by the ‘yellow metal’ yesterday on the back of a relief rally by the EUR after the Euro-Greco rescue package was made public. When the dollar temporarily struggles, investors tend to use the metal to hedge against further declines. Month-to-date, there has been a broad diversification away from the dollar, and by default this has given commodities a boost. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Stronger global fundamentals and a robust equity market are always positives for the commodity sector. Speculators are itching to take cash off the side lines and put it to work. Thus far, gold has been used as a conduit for a currency of choice. Up until this weekend Greece had been the unknown variable, downgrades and fear of defaults had investors seeking an alternative to an ‘on going weakening’ of the EUR and low interest rates. Are there still fears of contagion spreading amongst the weaker member states in the EU? Can Greece tap the market for refunding without paying too much of a premium? However this morning the ‘yellow metal’ has lost some of its ‘mojo’ as the dollar finds traction ($1,149).

The Nikkei closed at 11,161 down -91. The DAX index in Europe was at 6,235 down -15; the FTSE (UK) currently is 5,768 -9. The early call for the open of key US indices is lower. The US 10-year eased 7bp yesterday (3.85%) and is little changed in the O/N session. Treasury prices have again found some traction after 10-year product drifted towards last week’s high yields before details of the EU rescue package became public. The short end of the curve has garnered support from Bernanke’s comments last week that ‘joblessness, foreclosures and weak lending are dragging on the recovery’. With no supply for two-weeks, dealers are capable of running prices a tad higher. Technical analysts expect rates to remain elevated over the medium term. However, traders have been squeezing out the weak shorts. Now that the EU has shown its hand, how much of the insurance premium will be eventually priced out of Government bonds? US futures show that there is a +71% chance that the Fed will keep the target lending rate unchanged through Aug., up from a +58% chance a month ago.

Note: Dean will be away traveling for the next two week’s and will return to publication on April 29th.

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