PIIGS at Bay

The market is back to full strength after yesterday’s hiatus. Will the dollar once again find its ‘sea legs’ as European finance officials seem to be severing ties with Greece? The country must ‘rein in its budget deficit on its own’. The fear that the fiscal crisis could spread to other countries in the region is gaining momentum. Currently, their budget deficit is more that four times the desired 3% of GDP limits imposed by the European Union. Greece’s Finance Minister said that overall government debt will ‘peak’ at 120% of GDP next year. Credit rating agencies are chomping at the bit as the country seems to be dying a ‘slow death’ according to Moody’s. Be wary, this situation is not contained.

The US$ is mixed in the O/N trading session. Currently it is lower against 9 of the 16 most actively traded currencies in a ‘whippy’ trading range.

China is at it again. They have pushed one year Bill yields to a 14-month high to ‘curb record loan growth and prevent bubbles in the nation’s property and stock markets’. This has discouraged risk trading and promoted risk aversion trading strategies once again. However, there is enough liquidity remaining in the banking system to promote growth. The Chinese government’s objective is to manage the pace of loan growth and maintain ‘reasonable and sufficient’ lending. Remember, the rest of the world has experienced bubbles and they are living witnesses that they did not see them coming.

Both the European and German investor confidence index fell more than expected this morning. The ZEW index of investor and analyst expectations in Germany (six month future) dropped to 47.2 vs. 50.4 in Dec. While the European index fell to 46.4 vs. 48.2. The EUR has remained under pressure and is expected to threaten the 200-ay moving average at 1.4250-75.

The USD$ is currently lower against the EUR +0.13%, GBP +0.31%, CHF +0.01% and JPY +0.40%. The commodity currencies are weaker this morning, CAD -0.03% and AUD -0.08%. Despite the Martin Luther King holiday creating liquidity constraints, the loonie managed to find some traction and traded close to its 3-month highs as commodities and equity bourses rebounded after retreating after last weeks uncertainty. The greenback rallied vs. the EUR, aided by an increase in risk aversion trading strategies. Stronger Canadian fundamentals and the world’s appetite for the country’s rich commodity sources have the loonie encroaching on parity. Over 50% of total export revenue is from raw materials. The BOC has its rate announcement later this morning and the market expects rates to remain on hold (+0.25%). Governor Carney and fellow policy aids have been vocal and adamant that rates will ‘stay low’ until after June or until inflation becomes an issue. At the same time they have expressed the concerns on the strength of their currency and what it could do to future economic growth. We should expect them again to try and talk down some of CAD recent strength. Technically, the currency has come too far too fast. There are decent ‘size’ speculators willing to sell the loonie on dollar weakness. All eyes will be down at 9am EST. Also, the BOC is due to release its quarterly monetary policy report this Thursday.

The AUD came under renewed pressure against the yen overnight as the PBOC pushed its one-year bill yield higher for the second time this year, damping investor demand for riskier assets. Their objective is to curb record loan growth to prevent bubbles emerging in both the property and equity markets. Later this week China reports a plethora of data including their growth numbers. Recent stronger fundamentals had traders increasing their bets that the RBA will keep raising interest rates. They next meet at the beginning of Feb. With the Australian economy well into a recovery phase, there is added pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting (0.9261). On deeper pull backs, there will be strong speculation buying near 0.9100.

Crude is lower in the O/N session ($77.60 down -40c). Yesterday we saw oil creeping higher on speculation that the Chinese will increase import demand. OPEC member Qatar indicated that the organization will not be boosting production levels again this year as the ‘markets are sufficiently supplied’. Various analysts believe that China may boost imports by +15% to conform to their second phase of building strategic oil reserves. The danger is that OPEC could over-produce and add to the glut of available inventories. Last week the commodity managed to fall -5.7% to a three-week low as the dollar gained vs. the EUR, curbing demand for the ‘black-stuff’ as an alternative investment. It was the first losing week since early Dec. A bearish weekly EIA report supported by the earlier API findings had legitimate sellers queuing to sell on any rallies. The reports revealed rising US distillate inventories. Crude inventories rose +3.7m barrels to +331m barrels vs. an anticipated climb of +1.5m. Gas fared no better, its supplies advanced +3.79m barrels or +1.7%, to +223.5m. Finally, distillate fuel inventories increased by +1.35m barrels to +160.4m, compared with an estimated drop of -1.3m barrels. Fundamentally, the combined distillate number remains a strong sell indicator. Economic fundamentals support the ‘demand destruction theory’, as global growth remains mixed and modest.

The yellow metal remains range bound due in part to yesterday’s holiday in the US. The commodity ended last weak under pressure as a stronger dollar reduced the attractiveness of commodities as an alternative investment. However, traders believe there is a strong demand for gold on deeper pull backs with analysts anticipating the greenback again will renew its pressure to the downside this week ($1,134). Let see what the EUR has to say about that.

The Nikkei closed at 10,764 down -40. The DAX index in Europe was at 5,860 down -58; the FTSE (UK) currently is 5,441 down -53. The early call for the open of key US indices is lower. The US 10-year eased 7bp on Friday (3.67%) and is little changed in the O/N session. Last week it post its biggest gain since Nov. as retail sales surprisingly declined and consumer prices rose less than forecasted. The uneasiness of sustainable growth has managed to boost demand for FI product during last week’s US $84b note and bond sale auctions. Trichet’s comment about the ‘unclear’ future of European economic growth has also added to global uncertainty and has given risk aversion trading strategies a boost.

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