Long Dollar Contrarian likes these EUR Levels

If we excluded all the noise of the illiquid, volatile holiday trading sessions, we are back to where we left the markets last week, with the dollar maintaining its downward spiral, despite Trichet verbal pro-buck comments. Again, this holiday truncated week offers us some captivating events with Bernanke topping the agenda.

This ongoing USD selloff should find few obstacles ahead of Ben’s inaugural post-meeting press conference, where the market expects policy makers to remain on hold and very little change in the committee’s stance, except perhaps mentioning a weaker than expected first quarter growth and a pickup in commodity prices.

The market continues to ignore Euro-zone periphery issues and is concentrating on the US debate of its debt ceiling, which is threatening to push the dollar to new ‘carry’ lows or commodity currency highs.

Short dollar positions should respect the speed and strength of the recent dollar gains over the holidays. The contrarian is interested in buying dollars outright, especially versus the EUR at theses levels. The risk reward looks to be in their favor and they are willing to play the percentages.

The US$ is weaker in the O/N trading session. Currently, it is lower against 15 of the 16 most actively traded currencies in a ‘volatile’ session.

Any good news is welcomed in the US when it comes to housing. Yesterday’s Sales of New Homes in March happened to increase from an all time low the previous month (+300k or +11.1% from a revised +270k). However, on an annual monthly basis they are down -21.9% from March 2010. Coming off the worst year on record, the US housing market continues to find it difficult finding its legs. With soft demand, median prices continue to struggle and are down -2.9%, y/y, mostly on the back of deeply discounted foreclosed properties and on consumers continuing to find it difficult to qualify for mortgages under tighter lending conditions.

The USD is lower against the EUR +0.28%, GBP +0.15%, CHF +0.53% and JPY +0.09%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.32%.

Despite the greenback underperforming again, the loonie followed the same path yesterday and traded under pressure in the illiquid, lackluster day, as commodities were sold in profit taking. The CAD was able to erase the previous overnight gains as quick speculative long loonie positions booked profits outright and on the crosses.

Fundamental reason have aided the loonies rapid rise of late, but the speed of its rise has been somewhat over zealous, requiring a pull back from its four-year high print of last week that occurred after the stronger than expected domestic inflation data.

Canadian inflation beat all analysts expectations, even the BoC’s target set out earlier this month, marking the biggest monthly headline gain in 20-years (+1.1%) and the largest annual advance in nearly three-years (+3.3%). The market has been pricing in a tightening bias for the July BoC meeting.

Expect investors to covet the loonie as an alternative to the EUR and the dollar on these pull backs, assuming risk appetite remains the same (0.9553).

The AUD has rallied to a post-1983 float high this morning as the carry trade remains in demand on high yielding currency growth pull backs. Outright, the currency has appreciated +16% over the last year. Stronger fundamental data, like last weeks stronger terms of trade, has investors speculating that it now gives the RBA a strong reason to begin to tighten monetary policy again (+4.75%).

The RBA seem comfortable with interest rates at the moment, as highlighted in the released minutes this month. The Governor viewed his policy setting as appropriate, saying they will ‘look through’ higher inflation and slower growth stemming from natural disasters. ‘Headline inflation was likely to be quite high in the March quarter, while GDP would be held down, to a greater extent than earlier assumed’. It’s expected that the RBA will want to see more data that’s not so distorted by weather, which may take some time to come through, before moving on rates again.

Australian yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on any pullbacks (1.0765).

Crude is lower in the O/N session ($112.14 -14c). Oil prices remain better bid as the dollar underperforms and on continued Middle-East and Nigerian unrest which has the potential for further supply disruption in the regions. Last week’s EIA report is also supporting higher prices.

Supplies of crude fell -2.32m barrels to +357m last week (the first drop in three months). The market had forecasted a stock increase of +1.3m barrels. Gas inventories fared no better, falling -1.58m barrels to +208.1m (the lowest level in five-months). Stocks were expected to decline by -1.75m barrels. Year-to-date, crude has rallied +20%.

The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth based on its preliminary data for January and February. Both the IEA and IMF have said that prices above the $100 watermark are beginning to hurt the global economy. Recent price movements are being dictated by the value of the dollar and on speculators pushing prices to extremes. Even OPEC sides with the other agencies and added that they are unlikely to alter output targets when it meets in June as there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA.

Gold has raced to another record as investors sought to guard against inflation. Investors have a multitude of excuses to choose from to want to own commodities. Even the dollars demise could be included.

Prices are supported on speculation that record-low interest rates will encourage demand for an inflation hedge amid expectations that the Fed will maintain its accommodative monetary policy in the medium term. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise.

The precious metal has become the currency of choice despite Goldman recommending that if one owned commodities, the risks outweigh any further potential gain. The metal has jumped +30.5% in the past year.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store-of-value ($1,505 +$3.80c).

The Nikkei closed at 9,558 down-113. The DAX index in Europe was at 7,323 up+28; the FTSE (UK) currently is 6,039 up+21. The early call for the open of key US indices is higher. The US 10-year eased 4bp yesterday (3.37%) and is little changed in the O/N session.

FI prices rallied as US equities fell and the Fed purchased a higher-than-average amount of Treasuries before the two-day policy meeting beginning this morning. The Fed bought $7.24b of product, maturing from October 2016 to March 2018, as part of its debt-purchase program.

Expect the markets to remain tight ahead of today’s 2-year refunding as Capital markets eye the policy makers announcement and Bernanke’s first post-FOMC public appearance tomorrow.

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