US data to outperform EUR

What a week, and its only Friday morning. The market still has some data to chew on before one can sit back and figure what all this really means. The Central Bank thoughts and threats, swing’s in equities, and maybe the loss of a reserve currency. These and more has investors even more worried as the rumor mill intensifies.

This morning the focus will be on US July retail sales and August’s University of Michigan consumer sentiment. Some analysts expects that the headline retail sales rose +0.5%, m/m, making it the best reading in four months, with the increase mostly driven by a rebound in autos, after Japan’s supply related weakness earlier. Ex-autos and gas, market expects a modest gain of +0.3% m/m gain. Market should pay extra attention to the core release, a negative surprise, and it’s proof that a drop-off in final demand would drive concerns of recession risk further.

Michigan sentiment should be affected by the recent rout in global equities and the US ratings downgrade last week. Watch the inflation component. Any easing could increase the probability of further Fed implementing easing measures.

The EUR is hanging in tough with a lot of support. Its top side remains contained, with the bottom more vulnerable. The glue holding everything together will last only so long.

The US$ is stronger in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘subdued’ session.

A mixed bag of US data yesterday tried to distract the market from the SNB doing or not doing whatever they are intending to do. The US trade gap widened in June, with the deficit rising to -$53.1b from -$50.8b, as exports fell quicker than imports. It’s the widest margin in three-years, and proof that the US economy grew even slower during the second quarter than estimated by the government. Nearly all the negative surprise came from a -2.3% fall in exports (supposed to be one of the US’s few positives). This would suggest that Europe’s problems are starting to undermine exports. Imports fell by -0.8%, on a mix of weaker demand and falling oil prices.

The surprise was weekly unemployment claims falling-7k to +395k. The market did not expect this given the FAA furlough that had been in effect and ending just before the reporting period. The average claims figure fell by-3.25k to +405k. Continuous claims declined-60k, its largest weekly decrease in six-months, from 3.75m to 3.69m. The percentage of the eligible population receiving unemployment insurance fell to +2.9%. With three consecutive weeks of declines, claims are moving in the right direction. Let’s hope that this is a trend.

The dollar is higher against the EUR -0.01% and CHF -1.18% and lower against the GBP +0.29% and JPY +0.17%. The commodity currencies are weaker this morning, CAD -0.28% and AUD -0.28%.

The loonie advanced from almost its lowest level in seven-months as equities stateside rose, reducing the demand for the buck as a refuge. The CAD, despite this week’s turmoil remains one of the better behaved currencies, even with weaker data. Yesterday, Canada recorded its biggest trade deficit in nine-months in June (-$1.56b the fifth consecutive), as energy and auto exports fell, adding to evidence the country’s recovery is waning. Governor Carney said last month that export growth will remain modest because of a strong currency and the need for companies to regain competitiveness. This month, the loonie dropped -3.8% as global equities tumbled on renewed concern that the Euro-zone’s sovereign-debt crisis is getting worse.

There is a flip-side, because of the stronger Canadian fundamentals and yield differential (for now), investors will want to divest away from the EUR and USD. Once the markets absorb all of this weeks Cbanks actions or lack of, there will be an appetite from investors for a second tier reserve basket. Most commodity and interest rate sensitive currencies certainly belong to this basket.

The loonie remains at the mercy of risk aversion trading strategies and commodity prices. In the O/N market, investors look to be better sellers of dollars on rallies (0.9855).

The wild ride for commodity currencies continues, with the AUD being the prime example. A matter of day’s ago, the market was happily singing its praises, witnessing the currency breach the 1.10 barrier, some weaker global data and a credit downgrade later and this growth and interest rate sensitive currency is bouncing back from the USD trading premium a couple of sessions ago.

The AUD again is on the back foot this, following regional equity prices for direction. This weeks domestic data has been mixed. Full-time employment fell -22.2k in July, while part-time employment gained +22.1k, keeping total employment largely flat. June full-time employment was revised down to +18.2k from +23.4k. The unemployment rate rose to +5.1% from +4.9% in June, with the participation rate unchanged at 65.5%.

On the flip-side, consumer inflation expectation fell to +2.7% in August from +3.4% in July. The weak employment print should keep Governor Stevens rate changes in check, remaining on hold until further notice. Even with core inflation still running above the RBA’s target range, the policy makers can afford to step aside, unless there a dramatic collapse in global financial markets. That can be said for all other Cbanks. Just like the loonie, the AUD will trade with the swings in global risk appetite (1.0337).

Crude is lower in the O/N session ($85 down -$0.72c). Crude prices rallied for a second consecutive day, rebounding from their ten-month low, as declining US jobless claims sent bourses higher, adding to optimism that the US economy is strengthening. Some of the market believes that the Fed will implement a third round of asset buying to bolster the economy further.

US inventory numbers were also bullish for the commodity. The report showed that oil stocks fell -5.2m barrels to +349.7m last week. The market had projected a +1.5m barrel build. Crude imports fell-34k barrels per day to +9.07m. The IEA stated that the US’s SPR saw its stock levels fall -2.5m. Not to be outdone, gas stocks dropped -1.59m barrels to +213.5m, compared with market projections for a +500k barrel build. Average gas demand over the last four-week’s has fallen-3.4%, y/y. Distillates (heating oil and diesel) fell-737k barrels to +151.5m versus an expected rise +1.1m barrels. Refinery utilization increased +0.7% point to +90% of capacity, whereas the market projected a decrease of -0.4%

Crude prices continue to hold just above strong support levels. The Fed’s monetary policy will be bearish for the dollar and so should be bullish for crude in the longer term.

Gold bulls yesterday had their backs against the wall yesterday, as commodity prices plummeted, falling the most in two-months after the CME hiked margin requirements on futures contracts (+22%), a day after printing a record topping $1,800 and on the strength of equities being in the black. Big picture, the metal continues to be a recipient of safe-haven flows. Prices have more than doubled since the recession began in late 2007. This summer, its climb has accelerated because of the US Congress inability to stabilize the government’s ‘medium-term debt dynamics’, and on the back of Europe’s debt crisis threatening to spread to three of its biggest economies, France, Spain and Italy. The Fed’s efforts to drive interest rates lower to support lending are curtailing the dollar’s appeal as a safe haven.

Investors have bought more gold in the last month than in the prior six months according to CFTC data last week. Expect speculators to wait for a deeper correction before they start buying again. This week’s weaker longs should help their cause. The commodity is heading for its eleventh consecutive annual gain. In this environment $2,000 is very much in the realms of possibility over the next six months ($1,762 +$11).

The Nikkei closed at 8,963 down-18. The DAX index in Europe was at 5,889 up+92; the FTSE (UK) currently is 5,213 up+50. The early call for the open of key US indices is lower. The US 6-year backed up 10bp yesterday (2.32%) and is little changed in the O/N session.

US Treasuries prices fell as global equities rallied and a weekly jobs report showed initial jobless claims unexpectedly declined last week, damping demand for safe assets. Dealers also cheapened the back end of the curve as they prepared to take down the last of this week’s issue, $16b 30-year bond.

Treasuries have surged this month, pushing 10-year yields down more than -50bp, as the European sovereign debt crisis and a potential double-dip recession in the US sent pushed S&P’s down-13%.

It was a lousy 30-year sale. The auction was offered at 3.75%, +10bp higher than the level traded right before the issue, signaling weak demand. The bid-to-cover ratio was 2.08, compared to the average of 2.67 from the past four sales. The indirect bid took down +12.2%, compared with +39.1% from the past four sales. It was the lowest over all demand since 2008. The street owns them as the yields were not attractive enough for pension and insurance funds.

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