Trading EUR a game of patience

This morning’s headline German ZEW economic sentiment rose by 11.1 point last month. Considering the positive global recent data, this is further proof that capital investment is gaining momentum in Germany as well as abroad. With the Russians potentially reconsidering, positively, their position on their Spanish debt requirements and with the usual mix of Asian Cbanks and sovereigns amongst the EUR buyers overnight, begs the question, what has changed in favor for the EUR? The Euro-zone is no closer to an agreement on the EFSF and the peripheries continue to throw up fresh concerns-it’s a game of patience, the turn or any turn, if we can still afford a position, will be rapid and violent.

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

Now that the market is back to its full glory, the EUR stubbornly continues to disappoint the bears. Session after session the currency grinds higher, a formidable repositioning is in process even with the ‘negatives’ stacking up. Yesterday, data showed that the ECB bought the highest amount of periphery bonds in five-weeks. The back and forth chat that the EFSF must be ‘replaced and reinforced’ should have weighed on the currency, even the Spanish government halting this weeks auction in favor of a syndicated placement amongst Banks should have put further pressure on the currency. Can the market afford the wait?

The USD$ is lower against the EUR +0.93%, GBP +1.06%, CHF +0.69% and JPY +0.24%. The commodity currencies are stronger this morning, CAD +0.19% and AUD +0.57%. The loonie is piggybacking its two and a half year highs ahead of the BOC rate announcement this morning. Consensus expects Governor Carney to remain on hold. Data released yesterday again showed net foreign purchases of Canadian assets for November. The Canadian Finance Minister also unveiled changes to domestic mortgage rules, aimed at tightening record household borrowing, a concern noted in the last BOC communiqué. This Governmental move will provide Carney some breathing space. Some analysts are calling for an aggressive tightening policy by the BOC through out the year, potentially doubling current rates. It’s difficult to see Governor Carney wanting to hike aggressively if the Fed remain on hold, as a +200bp spread between the BOC and the Fed is not helpful, Canada is not China, it will not be ‘leading the US out of a recession’. Finance Minister Flaherty believes that the strength of the loonie is occurring on the back of international capital controls, its strength ‘was to be expected’ and that it was ‘wholly unreasonable for Canadians to expect the loonie to go back to days when it was significantly devalued’. It’s the result of Canada’s strong fiscal position. It has been amongst the best-performing currencies this month, as both crude and Canadian assets remain in demand for safer heaven concerns. Short term chartists continue to eye 0.9750 CAD in the first-quarter with investors looking for better levels to own the currency (0.9856).

The AUD has fallen -2.4% outright this month on speculation Chinese efforts to curb price pressures will slow growth in Australia’s largest trading partner. Currently the AUD seems well contained ahead of parity by the plethora of selling interest just in front. On the charts, the currency is preparing to break higher, supported by Japanese interest and their appetite for yield. Domestically, the Queensland floods is expected to temper the country’s economic outlook. Governor Stevens kept rates on hold last month (+4.75%) as some indicators were suggesting a ‘more moderate pace of expansion’.Growth is expected to slow this quarter and a tightening policy would not be the prudent course of action. Currently, the market pricing of rate cuts (4.75%) for the RBA February policy meeting and of rate hikes later in the year remains broadly unchanged. Already, RBA members are trying to put a monetary cost to the infrastructure damage from flooding, with suggestions of approximately +1% of GDP or $13b. Any significant cost will only delay any interest rate hike by Governor Stevens. Offers appear ahead of parity (0.9980).

Crude is higher in the O/N session ($91.67 +13c). Crude oil futures dipped in European trading yesterday, on the back of a stronger dollar and on the impending return to service of the Trans-Alaska Pipeline. The commodity had experienced five consecutive winning trading sessions on stronger North American data and on a rapid increase in energy demand from China, the second-biggest user of crude. The commodity this morning is trading near its 27-month high after the IEA raised its 2011 demand forecast, citing growing momentum in the economic recovery. Also aiding price speculation was a larger than expected drawdown on last week’s inventories. The EIA data reported a decline in oil stocks and above expectation increases for gas and distillates. Oil inventories fell -2.2m barrels vs. an expected decline of-300k barrels. In contrast, gas supplies increased +5.1m vs. an expected rise of +2.9m barrels, while distillates jumped +2.7m. There are too many hurdles to overcome ahead of the psychological $100 barrel of crude. Technically, the market is not showing a tighter supply or demand balance. OPEC believes that supply and demand are ‘in balance,’ and expect demand growth will slow as the global economy struggles to recover, amid ample supplies. The market expects to meet price resistance in the mid $90’s as there is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in theory.

On Friday, Greece had its credit rating cut to junk by Fitch, hot on the heels of similar downgrades at Moody’s and S&P’s. The lingering European debt crisis is expected to boost demand for the yellow metal as an alternative asset. Martin Luther King Day yesterday supported the lack of liquidity and interest in the commodity. Now that desks are back to being fully staffed should reignite market interest in today’s session. Last week’s successful Portuguese, Spanish and Italian bond issues had taken some of the shine off the yellow metal for safe-haven purposes. Analyst’s expect the metal’s losses may be limited on concern inflation will accelerate. Year-to-date, the commodity has softened on speculation that a sustainable global economic recovery would curb demand for the precious metal. Speculators expect currency volatility to boost demand for the metal on Euro sovereignty default concerns. The commodity last year completed its tenth annual advance with bullion rallying +30%. Even though the one direction trade feels overdone, investors continue to hold gold as a hedge against long-term inflation and have some strong technical support levels to breach before the markets witnesses a mass exodus. The Euro-zone contagion issues continue to put a floor on metal prices on demand for a haven. Technical analysts believe that gold ($1,369 +$8.50c) will outshine other precious metals in 2011 and peak somewhere above $1,600 in 2012.

The Nikkei closed at 10,519 up +16. The DAX index in Europe was at 7,142 up+64; the FTSE (UK) currently is 6,048 up+62. The early call for the open of key US indices is higher. The US 10-year eased 1bp yesterday (3.32%) and is little changed in the O/N session. Treasury prices have risen, pushing yields towards their lowest level in nearly a month, a continuation of the up trade from last week’s 10-year auction and softer global bourses during yesterday’s US bank holiday. With the lack of product from auctions this week and the ongoing EFSF ‘replacement and replenish’ debate should provide demand for the asset class on pullback in the short term.

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