How deep is the EURO black hole?

A question that should be answered this week. The Greek parliament is due to vote on their socialists government’s austerity measures at this Tuesday-Thursday session. Capital markets expects the legislation to pass. However, Prime Minister Papandreou’s government is not likely to achieve the two-thirds majority that the IMF/EU require.

Any majority should be sufficient for the disbursement of the next tranche of ‘troika’ aid. If, for some reason the legislation is rejected, we can expect capital markets again to plummet into deep uncertainty with significant negative implications for the EUR and risk appetite.

After a successful vote, market focus will shift to the negotiations on a supplementary rescue package for 2013, which the EU has said it aims to conclude by July 3. Analysts expect European data to moderate this week, which is unlikely to provide relief for risk. Even China’s assurance that it will continue to buy Euro-zone debt is helping to keep the EUR downside intact, but rallies are struggling as the Greek austerity vote keeps the ‘fear factor’ alive.

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

The dollar is higher against the EUR -0.01%, GBP -0.02%, CHF -0.49% and JPY -0.42%. The commodity currencies are weaker this morning, CAD -0.01% and AUD -0.44%.

The CAD ended last week posting its biggest weekly drop in two-months as risk-averse investors sought refuge in the most liquid of assets, the greenback. Higher yielding growth assets have come under pressure as investors risk-appetite goes ‘walkabout’ on the back of commodities softening on speculation that global economic growth may falter.

Earlier last week, the loonie seemed well supported by ‘real’ money buying. However, the IEA announcement to ‘flood’ the oil market has allowed the real money interest to temporarily back off.

Big picture, the currency has held in very well over the last five trading sessions despite the release of weaker data down-south. With close to 70% of Canada’s total exports heading south of the border, weak US data releases seemed to be having little effect on the loonie. Now it’s a period of catch up.

With the Fed cutting its growth objective for the remainder of the year has higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9867).

The AUD dropped through key technical support levels to an eleven-week low after the dollar rallied in the O/N session. The currency remains under pressure on concerns that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis and will continue to dampen appetite for higher yields. Supporting the selling pressure was the RBA’s board minutes for June reaffirming a noncommittal Central Bank.

Governor Stevens and company cited growing concerns in Europe, downside surprises in US data and deterioration in non-mining related industries as giving the board enough reason to remain on hold until further notice. The minutes were also less explicit than RBA Governor Stevens’ speech last week on emphasizing upcoming data like the CPI report. The market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0449).

Crude is lower in the O/N session ($90.24 -0.92c). Oil prices found firmer footing on Friday, a day after tumbling to its lowest price in four-months after the IEA said its members would release crude from their SPR’s. They intend to inject +60m barrels of government-held stocks onto the global market, immediately increasing world supply by +2.5%.

This comes after OPEC failed to raise production quotas earlier this month. ‘Tightness in the oil market threatens to undermine the fragile global economic recovery’. After the announcement, WTI lagged Brent decline as traders speculated that the reserve requirements would have a more direct affect on Brent crude. Year-to-date, unrest in the crude-producing Middle-East and North Africa has sparked hefty price gains.

According to analysts, this move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold fell on Friday, completing the biggest two-day drop in two-months, after a pledge by EU officials to stabilize the region’s economy slashed demand for the commodity as a haven. Margin calls in other asset classes required investors to raise fresh capital by selling the yellow metal.

This has been a classic risk aversion trading pattern, with the dollar and gold inversely correlated. The dollar has gained on heightened concerns about slowing global growth spurred a flight to safety, following a bleak outlook by Bernanke. Gold prices are-5% below its early May record high as the +3.2% gain in the dollar is hampering any rallies.

The commodities dependency on the buck and the outlook for US rates is likely to remain intact. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,497 -$3.10c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,578 down-101. The DAX index in Europe was at 7,114 down-7; the FTSE (UK) currently is 5,697 down-1. The early call for the open of key US indices is higher. The US 10-year eased 6bp on Friday (2.86%) and are little changed in the O/N session.

A flight to quality has the US curve encroaching on this year’s low yield. Fueling the demand for FI was US jobless claims climbing last week and Trichet stating that the sovereign-debt crisis threatens to infect banks. Year-to-date the ten year benchmark has fallen more than 34 basis points on concern that the US economic recovery is weakening and the Euro region is struggling to contain its sovereign-debt crisis.

The market is concerned about holes in parts of the Greek austerity package that could put their own situation in further jeopardy. Rumors that the Greek Prime minister has doubts on his party’s capability of pushing though the austerity measures this week is producing a trading environment with no sellers of product.

This is the sixth consecutive week that 10’s have rallied, breaking through some key resistance levels that open up the possibility of +2.75% to trade. The market has seen a steady grind to lower yields without a significant pullback, investors seem to be waiting for the ‘storm to pass until there is some clarity from Greece’.

Dealers will now try to set themselves up to take down US supply this week (2’s, 5’s and 7’s). In this environment traders should have no problems placing product, but, it will be expensive.

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