Hold on to that EUR short just a little bit longer

Does a close above the psychological 1.3500 negate a bearish move? Many hope not, but this ten-day squeeze is proven costly. Reasons for ditching such negative Euro thoughts have been piling up this week. Anything from Russia renewed investment interest in Iberian debt to rumors that Portugal will cancel next weeks auctions on the back of having too much money. Technically, a broad based dollar weakness has extended the EUR’s gains and not the Euro-finance chiefs pledging support for the region’s most-indebted countries. What else can they say? No, we are not. The surprise, Germany’s Chancellor Merkel reportedly saying that Germany would continue to do what is necessary to guarantee a stable EUR. Does that mean ‘replacing and replenishing’ the EFSF? With the Chinese in town Yuan support was expected. PBOC Deputy Governor Gang Yi indicated that China may fully liberalize its capital account within five-years, a statement that is supporting risk appetite and weighing on the dollar. Can the bears hold out until they go home?

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

Yesterday’s first regional survey got off to a strong start. The Empire State Factory happened to post a modest gain to 11.9 from a revised 9.9 December print. Digging deeper, the details revealed much larger improvements. There were big increases in orders and shipments and turnarounds in inventories and employment. Certainly a plus to future ISM releases. The pickup in current activity was matched by increased optimism about the future. The capital spending plans index climbed 12 points, its best level in nine-months. The six-month general activity outlook index climbed to its highest reading in nearly seven-years. Not to be outdone, the manufacturing outlook has also started this year on a strong note. The bad news, it is only one reported region.

Other US data releases yesterday showed that NAHB homebuilder sentiment index was unchanged for a third consecutive month in January (16). Fundamentally the survey has remained somewhat depressed since the end of the home-buyer tax credit program. Digging deeper, the sales condition subcomponent (current and expected sales) for the next six-months were unchanged, while the subcomponent gauge for traffic of prospective buyers edged up a point. Tougher financing conditions and the glut of existing homes continue to dampen the report.

The USD$ is lower against the EUR +0.47%, GBP +0.08%, CHF +0.50% and JPY +0.33%. The commodity currencies are mixed this morning, CAD -0.15% and AUD +0.50%. The BOC stuck to its guns and kept rates on hold (+1%) yesterday. The following communiqué was ‘unequivocally dovish’, a disappointment to a market that has been pricing in a hike in the 2nd Q. Despite domestic and global positive data of late, Governor Carney did not change his outlook for growth and inflation. Policy makers acknowledged that there is more excess supply in the near-term than previously expected and expects this supply to be closed by the end of next year. They also expect core inflation to edge up to +2% by the same time level. Policy makers again flagged the fiscal drag and ‘stretched household balance sheets as downsides’ to their growth targets. Expect to get a better insight after today’s MPR release. Their dovish position has pushed the loonie to back off from its strongest level in two-years as the market digests rates being on hold and an economic recovery being threatened by a European fiscal crisis. Fundamentally, Carney is under no pressure to begin the next tightening cycle. It’s difficult to see the Governor even wanting to hike aggressively when the Fed remain on hold. Policy makers will not allow the yield spreads to widen aggressively. Canada is not China and will not be ‘leading the US out of a recession’. Expect short term profit taking to remain (0.9930). There is strong dollar interest at parity to buy CAD dollars.

The AUD has rose to a two-week high in the O/N session, and this despite a weaker confidence number (-5.7%). It’s mostly on the back of the expected growth data out of China this evening (GDP +9.4%). It’s anticipated that tonights data will be further proof that China’s efforts to curtail inflation is not curbing growth in Australia’s largest trading partner. Fundamentally, any weakness in the Chinese numbers and commodity sensitive currencies like the AUD and loonie will be first to feel the negative effects. There remains a plethora of selling interest all the way up, however, the currency is being supported by direct Japanese interest and their appetite for yield. Domestically, the Queensland flood is expected to temper the country’s economic outlook. Governor Stevens kept rates on hold last month (+4.75%) as some indicators were suggesting a ‘more moderate pace of expansion’. Growth is expected to slow this quarter and a tightening policy would not be the prudent course of action. Currently, the market pricing of rate cuts (4.75%) for the RBA February policy meeting and of rate hikes later in the year remains broadly unchanged. Already, RBA members are trying to put a monetary cost to the infrastructure damage from flooding, with suggestions of approximately +1% of GDP or $13b. Any significant cost will only delay any interest rate hike by Governor Stevens. Offers continue to appear ahead of Chinese growth data (1.0020).

Crude is higher in the O/N session ($91.85 +47c). Crude oil prices stuttered yesterday. They tentatively retreated from its 27-month high after the IEA stated that ‘supplies are ample’, with US inventories ‘well above’ the five-year average. The commodity had experienced six-consecutive winning trading sessions on stronger North American data and on a rapid increase in energy demand from China, the second-biggest user of crude. Last week’s EIA report recorded a decline in stocks and above expectation increases for gas and distillates. Oil inventories fell -2.2m barrels vs. an expected decline of-300k barrels. In contrast, gas supplies increased +5.1m vs. an expected rise of +2.9m barrels, while distillates jumped +2.7m. There are too many hurdles to overcome ahead of the psychological $100 barrel of crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance in the mid $90’s as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

The recent price action of gold is like witnessing a slow moving train wreck. The market is undoubtedly long the product and cannot afford for it go down. Investors are relying on fundamental scraps to justify adding to their positions. The price erosion that we have witnessed in the beginning of this year is again promoting physical buying, specifically in Asian and on concerns that Europe’s sovereign-debt crisis may linger, even after the Euro-finance minister’s pledge to strengthen a ‘safety net for debt-strapped countries’. Last week’s successful Euro-periphery bond issues had taken some of the shine off the yellow metal for safe-haven purposes. On a macro level, analysts expect the losses may be limited on concern that inflation will accelerate. Speculators expect currency volatility to boost demand for the metal on Euro sovereignty default concerns. The commodity last year completed its tenth annual advance with bullion rallying +30%. Even though the one direction trade feels overdone, there are some strong technical support levels to breach before the markets witnesses a mass exodus. Technical analysts believe that gold ($1,372 +$4) will outshine other precious metals in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,557 up +38. The DAX index in Europe was at 7,152 up+10; the FTSE (UK) currently is 6,049 down-6. The early call for the open of key US indices is higher. The US 10-year backed up 6bp yesterday (3.38%) and is little changed in the O/N session. There were a multiple of reasons for treasuries having a bad day yesterday. There were rumors of the ‘fat finger syndrome’ inadvertently selling product on the screens. Gossip that Portugal was in the midst of canceling it auctions next week, because they had enough cash, to natural profit taking occurring at the recent low yields. The up tick in corporate bond supply and rate lock selling has managed to keep pressure on prices. Eventually, with the lack of US product this week and the ongoing EFSF ‘replacement and replenish’ debate should provide demand for the asset class on deeper pullback in the short term.

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