Month-End needs Overshadow Greece and China

Simply put, today is month-end. Traders all week have been consumed with the peripheral market noise. The Fed, Greece, China, all important, but when it comes to ‘lemming’ revaluation of portfolios for month-end requirements, logic tends to be thrown out the window with the bath water. Banks models suggest that USD will have to be sold today. With a long week-end in the UK and strong a ‘percentage’ chance that a Greek bailout could finally be formulated has us asking the question will market participants want to trim their record short EUR positions. The percentage play says yes. Technically, already we have taken out the 1.3280 and the 1.3310 resistance this morning and there is a plethora of individuals wanting to sell EUR’s at higher levels making this move drag-on. Their ideal entry level is around the 1.3400 print. The intraday month-end move can be somewhat justified by what portfolio managers have been doing in April. They have been meticulously selling EUR denominated assets’ requiring them to repurchase EUR’s to re-hedge themselves. Will the SNB allow us to re-enter at better levels?

The US$ is mixed in the O/N trading session. Currently it is lower against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

We woke to a nice surprise in North America yesterday with fewer unemployment claimants applying for benefits and providing the investor evidence that the economic rebound is lifting the labor market. The weekly jobless claims fell by -11k to +448k last week and in-line with market expectations. The labor market is healing slowly with firings easing and manufacturing companies adding workers. The knock on effect should improve consumer spending for the remainder of the year. The first whispers for nest week’s NFP number is around +175k. Digging deeper into the report, the 4-week moving average of initial claims (less volatile measure) rose to +462.5k last week from +461k. The number of people continuing to receive jobless benefits dropped by -18k to +4.65m, disappointing various analysts who had expected a drop to +4.62m. On the plus side, the individuals using their traditional benefits and are now collecting emergency and extended payments decreased by -91k to +5.4m. The report certainly plays into the Fed’s rhetoric of this week where they indicated that the labor market is beginning to improve.

Is China ready to revalue this weekend?

• The G20 last week did not pressure them, thus saving face and giving the Chinese autonomy to revalue on their ‘time scale’.
• It’s a long-weekend in China. The norm of late has been to announce policies before a long weekend.
• The Shanghai Expo is a prestigious event in China. This would give the media an excuse to focus on the cultural event rather on the policy decision, some would say ‘saving face for the authorities’.
• Finally, China is scheduled to have dialogues with the US by the end of May. This is an opportune time to get the ‘reval or reform’ issue out of the way.

Many none of these reasons are valid, but, after this week it would be throwing an interesting ingredient into the mix.

The USD$ is lower against the EUR +0.37%, GBP +0.33%, CHF +0.30% and higher against JPY -0.11%. The commodity currencies are stronger this morning, CAD +0.23% and AUD +0.38%. The Canadian dollar is two for two, rising a second consecutive day against most of its G7 members as stocks and crude oil climbed, boosting investors’ appetite for currencies tied to global growth. Stronger global corporate earnings coupled with the Fed’s statement that it will hold interest rates ‘exceptionally low’ and a more optimistic view of labor markets is also helping the loonie to soar towards parity and beyond. The belief that European official will speed up the financial aid process for Greece has speculators looking to invest in growth commodity currencies. 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. Governor Carney reiterated to a House of Commons committee this week that it’s ‘appropriate to begin to lessen the degree of monetary stimuli’. The Canadian Finance Minister’s comment that the loonies’ appreciation to parity has been orderly shows that the government is comfortable with the currency’s value. Canada seems to have adjusted appropriately to these levels. USD rallies remain shallow and are met with strong resistance. If the Chinese do happen to revalue this weekend owning the CAD looks good.

It’s a know fact that the AUD has climbed +27% vs. the USD over the past 12-month and is the best performer amongst the 16 most-traded global currencies. A survey conducted by CBA bank amongst 600-medium sized importer and exporters expect the currency to advance to 0.9560 (0.9311) by year-end. Again, last night the currency advanced, heading for its third-straight monthly gain as signs Greece will agree to budget cuts to win a potential $159b bailout has revived investor appetite for higher-yielding assets. Also aiding the currency cause was the strengthening momentum of the regional bourses coupled with the news that Australian bank’s happened to boost their lending last month. Similar to the CAD, any improvement in risk appetite will have investors coveting higher yielding growth currencies. Expect better buying on pull backs.

Crude is higher in the O/N session ($85.96 up +79c). Now that the Fed has stated that it will keep rates on hold for an extended period of time, coupled with the weekly EIA report showing that refineries cap-u is at the highest level in two years has once again given the black stuff a ‘leg up’. With the Fed emphasizing the strength of the economic recovery in this week’s minutes is having a positive impact on the commodity. The somewhat ‘bearish’ inventory headline was offset by the surprising decline in gas stocks. Oil inventories rose +1.9m barrels last week, more than double expected (+0.9m). That puts total crude and refined products at their highest level in 4-months. They have grown in five of the last six weeks. All this is occurring despite refineries increasing their operating levels (+89% vs. +85.9%) w/w. It’s worth noting, that in total, refiners have dragged their utilization rate higher by +6.4% in the last month alone, and all the while not knowing how much fuel demand will rise in the next few months. Digging deeper into the report, distillate inventories (heating oil and diesel) rose by +2.9m barrels vs. an expected build of + 1.2m. In contrast, gas stockpiles fell -1.2m barrels, compared with expectations for a gain of +600k. Analysts remain concerned that the European contagion issues will dominate risk aversion, making the $80 floor ripe to be threatened in the medium term. It’s worth noting that crude oil volatility has fallen to its lowest level in almost 3-years on the back of rising stockpiles and OPEC’s ‘investment in production capacity easing concerns of shortages’. The lack of volatility has ‘temporarily’ dampened any selling enthusiasm. Expect better selling to remain on rallies.

After gold achieving another 4-month high earlier in the week, investors took some profit off the table for the first time in five sessions yesterday, on speculation that gains by the dollar will curb demand for the metal as an alternative asset. For most of this week, investors have sought surety in owning dollars and gold after S&P’s lowered the credit ratings for Spain, Portugal, and Greece. Gold priced in the EUR, GBP and CHF did manage to print new record highs. Historically, gold falls when the dollar gains. In a ‘bigger picture’ frightened Capital is seeking a safer heaven as the European confusion continues. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors seeking an alternative to an ‘on going weakening’ of the EUR and low interest rates unless the EU/IMF can strike a market accord ($1,173).

The Nikkei closed at 11,057 up +132. The DAX index in Europe was at 6,191 up +47; the FTSE (UK) currently is 5,629 +12. The early call for the open of key US indices is higher. The US 10-year eased 2bp yesterday (3.73%) and is little changed in the O/N session. Treasury prices initially softened ahead of the final weekly auction yesterday ($32b 7-year auction). Again, it was another weekly record amount of $129b to be absorbed by the market. The European contagion issues did make it somewhat expensive to take down product at the beginning of the week. However, yesterday’s 7-year auction came in at a yield of 3.21% compared with pre-auction yield of 3.204%. The bid-to-cover ratio was 2.82 vs. last month’s 2.61 and Feb.’s 2.98 (8-auction average is 2.79). The indirect bid (proxy for foreign interest) was 60%, the highest this year, compared with 41.9% in Mar. and 40.3% in Feb. With a lack of product on offer for awhile, investors have kept the FI curve better bid on price pull back for the moment.

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