Market seeks excuses to short Euro

The news that two Irish independent MP’s will support the Governments budget vote later today has increased the likelihood that the Irish ‘austerity’ budget will pass. An unsuccessful vote would trigger an early election and push back the implementation of the ECB/IMF rescue plan. The knock on effect would increase risk aversion and warrant the immediate fresh selling of EUR’s. On the other hand, the improvement in global risk appetite from a successful budget vote is expected to be limited as Capital Markets shift their focus to Portugal and Spain. It’s up to Trichet to keep buying those periphery bonds to shore up investor confidence, otherwise the market will find more excuses to add to their short EUR positions.

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’ trading range.

History repeats itself. Proof being the boringly quiet first trading session yesterday after a disappointing NFP report last week. The first Monday generally ends up being the quietest trading day of the month and none of the asset classes were able to break with tradition. However, the O/N session did not disappoint. News that President Obama is extending the Bush-era tax credits and the potential for further QE has again piqued investors interest. Event risk remains on the radar. The market is keeping a watchful eye on the Euro-finance ministers meeting this morning. Yesterday, members stated that the EFSF did not require any more capital to handle the difficult situation with the current sovereign debt crisis and will rely on the ECB bond purchase program to calm investors. The market remains nervous about sovereign debt, as the focus now shifts from Ireland to Portugal and Spain. Elated movements will be limited.

The USD$ is lower against the EUR +0.51%, GBP +0.51%, CHF +0.39% and JPY +0.01%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.52%. The loonie was still the second-best performer against the greenback yesterday among its G10 counterparts as sovereign-debt concerns weakened the EUR. Even mixed domestic data did little to upset the currency ahead of this morning’s interest rate decision by the BOC. On the crosses, and especially vs. the EUR, the loonie remains in demand. The Ivey PMI unexpectedly rose last month (57.5 vs. 56.7). The print has had little influence on the overall movement of the currency, the most important component, the employment index stood at 54.8, further proof that the job situation was still expanding. The currency has had to deal with much ‘noise’ over the last week with potential mergers, takeovers and Cbank interest pushing the currency towards parity outright. The degree of strength of the CAD is at odds to what has been happening elsewhere and that tends to lead to speculation of customer flow execution. It’s unanimous that Governor Carney is expected to remain on hold at +1% well into the New Year. For the time being, the loonies demand remains a function of investors risk desire and not on its softer fundamentals of late. Parity and beyond will be the ‘flavor du jour’ for dealers agendas next year, for now we have Governor Carney to wait for.

It was not much of a surprise last night to see the RBA keeping its benchmark interest rate on hold (4.75%) as the country’s growth slows and risks to the global economic recovery persist. Policy makers expect inflation to be contained through mid of next year. Governor Stevens said monetary policy is ‘appropriate for the economic outlook.’ The currency’s strength ‘will assist, at the margin, in containing pressure on inflation over the period ahead.’ Year-to-date, the Aussie has risen +8.5% outright vs. the dollar and the second best performing currency this year. Several domestic releases show that the Australian economy had decelerated of late. Retail sales declined in October, it’s largest decline in twelve month and business profits also dropped last quarter, the first decline in more than a year. Futures traders are now betting that there is an 88% chance Governor Stevens will leave borrowing costs unchanged through the first quarter of 2011. Currently, like all growth and interest rate sensitive currencies, demand for the AUD depends on investors appetite for risk as they continue to assess the severity and likelihood of the Euro-zone debt crisis spreading. There is natural resistance at parity(0.9960).

Crude is higher in the O/N session ($89.46 +8c). Crude prices were little changed yesterday as the dollar strengthened and the psychological resistance level of $90 was difficult to penetrate just yet. Investors have shrugged off a disappointing NFP report and instead have focused on the recent stronger fundamental releases that signal that the US economy s growing, albeit at a slower pace. Investors have also dismissed last weeks surprising increase in weekly stock levels. Oil inventories rose +1.1m barrels last week vs. an expected decline of -1.1m. Gas stockpiles rose -600k barrels compared to expectations for no change, while stocks of distillates (heating oil and gas) fell by -200k barrels, analysts had expected a -1.1-million-barrel drop. Demand for oil and fuel products has fallen to the lowest level since mid-October. The increase follows two consecutive months of mostly steady declines after levels reached 27-year highs in September. The market continues to look past the increases and is focusing on the improving economic data in the US and China, as well as the possibility that the Fed may extend stimulus measures. Also aiding prices is Goldman predicting that a second stage recovery in oil markets will occur next year ahead of oil prices trading above $100 in 2012.

Gold continues its upward momentum, making an assault on its record highs, on concern that the US economy may need more stimuli, boosting the appeal of the metal as an alternative to holding currency. Even with the dollar strengthening, the commodity remains supported by the persistent concern over Euro debt levels and with NFP barely growing last month, with the jobless rate unexpectedly hitting a seven-month high, should create more US deficit spending and support for the metal. To date, debt contagion has driven investors into the third ‘reservable’ currency as they seek a store of value. Despite the fear that China will tighten their monetary policy next year, a move to curb speculation and dampen inflation, global demand remains robust. Even though the one direction lemming trade seems to be overdone, investors continue to hold gold as a hedge against currency debasement and long-term inflation. The Euro-zone backdrop puts a floor on gold prices as these pullbacks have been somewhat supported on demand for a haven in the midst of Europe’s sovereign-debt crisis. Year-to-date, the metal is up + 24.8% and is poised to record its 10th consecutive annual gain ($1,423 +$7.70c).

The Nikkei closed at 10,141 down-26. The DAX index in Europe was at 6,996 up+43; the FTSE (UK) currently is 5,804 up+34. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (2.93%) and backed up 7bp in the O/N session (3.01%). Bernanke’s comments that the Fed may boost purchases of the securities to prop up the recovery, again pushed yields down from their four-month low print last week during yesterday’s session. The 2/10’s spread narrowed to +251bp ahead of this week’s Government auctions ($66b-3’s, 10’s and bonds). While fundamentals have improved, there is still much uncertainty out there and Bernanke and other policy makers continue to buy which will limit yield rises. Fundamentally, for 10’s to break through the +3%, the market will require better economic data to do so or perhaps Obama agreeing to extend tax cuts will offset Europe’s debt crisis spreading further.

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