Trichet and ECB remain predictable

[mserve id=”Central_Bank_ECB.jpg” align=”left” width=”291″ caption=”European Central Bank” alt=”European Central Bank ECB” title=”European Central Bank “]
A plethora of data this morning as the market waits for the expected rate announcement from Trichet (+1%). ‘They are to remain at a record low to boost the economy’, a parrot could be more interesting, but that is the nature of the ECB. Their currency had a wild ride yesterday. Initially, with the dollar under pressure, technical analysts were salivating as the EUR threatened to breach that 1.4580/90 benchmark. However, the Greeks saved the dollars day. Again, and an old story, concerns of Greece’s stability was the catalyst. The ECB has advised their government ‘not’ to pass a law that would allow Greek companies to postpone or restructure debt payments to financial institutions. Tomorrow the market will get more details on their ‘stability and growth program’. What about Dubai? Are there any more delays on their debt payments? Expect the EUR to feel the heat.

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

Yesterday the Beige Book indicated that while economic activity in the Fed’s 12 districts remains ‘at a low level, conditions have improved modestly further during the mid-Nov. to early-Jan. period’. Ten Districts reported activity as improving while two reported that conditions were mixed. While consumer spending remained below that of 2-years ago, levels were seen as improving over the holiday period compared to last year. Not surprisingly, consumers remain ‘cautious, price sensitive and focused on necessities, but sometimes willing to spend on discretionary purchases’. Digging deeper, analysts note that auto sales were steady or increased slightly. It was also a similar story with US manufacturing activity. Tourism was weak, while home sales increased and home prices were little changed. Of note, residential construction remained at very low levels and commercial real estate ‘was still very weak everywhere with rising vacancy rates and falling rents’. Will it be our next big bubble perhaps? Nothing positive could be said about the labor markets, they were ‘generally weak’. Inflation concerns were non-existent, as price pressure remained subdued. The report revealed no ‘big’ surprises, I guess we have just focus on US treasuries and see how we are going to handle higher rates.

The USD$ is currently lower against the EUR +0.09% and GBP +0.03%. It is higher against CHF -0.06% and JPY -0.45%. The commodity currencies are mixed this morning, CAD -0.08% and AUD +0.69%. Already this week we have witnessed surprising Canadian Trade data pressurizing the loonie. Some of the weakness was also aided by weaker commodity prices. Despite oil plummeting yesterday after a bearish weekly EIA report, the CAD advanced in tandem with other G7 countries vs. the world’s reserve currency. Even with deep economic ties with the US (70% of Canadian exports head south), the loonie get a leg up, especially from cross currency action. Technically, the currency has come too far too fast, and is due a breakout to the top side soon when commodity and economic fundamentals take their toll. There are decent ‘size’ speculators willing to sell the loonie on dollar weakness. The BOC meets next week and they continue to be vocal on their commitment to keep rates low. I wonder what they will say about our currency effecting our economic growth. This is an uncomfortable situation for Carney and his policy makers. All things being equal, any glimmer of growth will have the loonie trading above parity sooner than we think.

The AUD remains the king after their stellar employment report last night. Jobs gained for a fourth consecutive month as companies added 3-times more jobs than economists estimated (+35.2k). The jobless rate fell to 5.5% from a revised 5.6%. This pushed the currency high as traders increased their bets that the RBA will keep raising interest rates. Strong fundamentals and robust commodities have kept the RBA on their toes regarding tightening monetary policy. The economy is now well into a recovery phase and adds pressure on Governor Stevens to increase the O/N borrowing cost to 4% for a fourth straight meeting. Futures are now predicting that there is a +76% chance that this will occur (0.9302). If the global economic recovery remains on track, the market should expect the AUD to be trading at parity to the USD by years end.

Crude is higher in the O/N session ($80.13 up +48c). Yesterday, oil fell to its lowest level this year, shredding -2.5%, after the bearish weekly EIA report supported the earlier API findings. Rising US distillate inventories, despite the severe northern hemisphere winter is weighing on commodity prices. It was only on Monday that the black stuff printed a 15-month high. There have been some concerns that Chinese tightening would moderate the global economic recovery, this seems to have unnerved financial markets, pressurizing stocks and higher-yielding currencies. Crude inventories rose +3.7m barrels to +331m barrels last week vs. an anticipated climb of +1.5m. Gas fared no better, its supplies advanced +3.79m barrels, or +1.7%, to +223.5m. Analysts again underestimated the levels, as they expected only a rise of + 1.7 million barrels. 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 was a strong sell indicator. The commodity has fallen just under -5% since China announced increasing its Bank reserve requirements and this after a +15% gain over the illiquid holiday trading season. Global fundamentals reinforce the ‘demand destruction theory’. Stalling UK and German economies combined with China hiking its bill rates, has investors nervous about riskier trading positions.

Already this week the ‘yellow metal’ has managed to print a new monthly high ($1,163) as a weaker greenback increased demand for the commodity as an alternative investment. Traders had been taking it upon themselves to book some profits after the +5% rally. Initially and for a second consecutive day, traders continued their selling intentions on speculation that investors were paring their riskier investments ($1,125). By day’s end and completing the biggest intraday drop, the commodity aggressively rebounded as investors demand for a haven from a weaker dollar and lower prices for other commodities boosted the ‘yellow metal’ prices. On deeper pull back investor’s remain strong buyers ($1,136).

The Nikkei closed at 10,907 up +172. The DAX index in Europe was at 5,993 up +31; the FTSE (UK) currently is 5,499 up +26. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.78%) and are little changed in the O/N session. After auctioning $84b’s worth of new product this week, the US yield curve has shifted and is providing us with a ‘bear steepener’. The 2/10’s spread widened out to 283bp from a tight 280bp after the Beige Book that the US economy improved in 10 of the Fed’s 12 districts last month. Supply outstripping demand is weighing heavily on prices, a good example was the 10-year auction yesterday as indirect bids disappointed. The 10-years came in at a yield of +3.754%. The bid-to-cover ratio was 3 compared with 2.62 in Dec. and 2.81 in Nov. The average is 2.76 from the past 8 auctions. Indirect bids were 29% compared to 34.9% in Dec. and 49.3% in Nov. The average is 42.8% in the last 8-auctions. Surprisingly, direct bids were 17% vs. 8.9%. Today we get the final auction of a busy week. Treasury will sell $13b of 30-year debt, completing the $84b of the total debt that was on offer this week. The market should expect further pressure on the curve.

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