With the EURO’s will there is a way

Plummeting was the operative word yesterday, plummeting treasury prices, and plummeting commodities. It was either a two month high or low for various asset classes. The EUR survived the liquidation carnage and is again testing key resistance levels this morning, buoyed by the improvement in the German IFO business confidence index (110.3 vs. 109.8). Despite the current assessment weakening somewhat, expectations hit a new high. With optimism that Euro policy makers will find a long term solution to deal with the sovereign-debt crisis and the fact that the Fed will continue its low rate policy has the EUR bears looking for better levels to short the region. Technical, options and fundamental resistance remain an obstacle just ahead of 1.3600.

The US$ is weaker the O/N trading session. Currently, it is lower against 14 of the 16 most actively traded currencies in a ‘whippy’ O/N session.

US data yesterday certainly provided the spark for those seeking support for their short EUR convictions, temporarily at least. Only for a large EUR/GBP order going through happened to deny them of more bankable dollar profits. The fall in weekly US claims to +404k, below market expectations of +420k calmed fears that were stoked by the previous reports spike. The headline print has returned to the ‘pre-seasonal’ induced levels, as the timing issues are no longer relevant.The sharp revision reflects simple seasonal volatility. Analysts expect the seasonal factor to see another sharp drop next week before calming down again next month. Investors will take this week’s dip as support for the recent improvements in the US labor market fundamentals and will expect claims to reassume their persistent downward movement that was the new norm we witnessed at the tail end of last year. Digging deeper, continuing claims dipped-26k to +3.89m, the third consecutive week of improvement. The trend remains your friend.

Existing home sales has a trend and yesterday’s surprisingly +12.3% increase last month broke it. The housing market ended the year on an encouraging note. Will it continue? Despite the monthly jump, the housing sector remains a weak spot in the US economy. Potential buyers have been squeezed out by the tight lending practices and a precarious job market. The expiry of the homebuyers tax credit has not been helping to revive sales. Digging deeper, the median sales price continues to fall, down-1% to +$168k month over month. The inventory of previously owned homes listed fell -4.2% to 3.56m units, pushing the month supply to +8.1 months vs. 9.5 months. Of course, the unknown variable remains the shadow inventory.

Finally the disappointment, the Philly Fed business outlook fell -1.5pts to +19.3 this month. Consensus was looking for a smaller decline. Forgetting the headline, the internals look much stronger with many sub-sectors reveling stronger gains. For instance, the forward looking new-orders rose from +10.6 to +23.6, shipment from +5.2 to +13.4, unfilled orders from +4 to +8.7. Most encouraging was the employment index spiking higher from +4.3 to +17.6, the strongest level in nearly 5-years. Price pressures appeared to edge higher (paid and received), perhaps an indication that we will see the business pricing power effect being passed on. The report piggy backs the Empire survey of last week, not the headline the internals and they look strong.

The USD$ is lower against the EUR +0.45%, GBP +0.02%, CHF +0.37% and JPY +0.15%. The commodity currencies are mixed this morning, CAD +0.01% and AUD -0.40%. The fear of China extending a tighter monetary policy had commodity sensitive currencies on the back foot. The loonie happened to breach parity for the first time in two weeks on the back of gold and oil prices both plummeting yesterday and this despite encouraging data from its largest trading partner. Year-to-date, the loonie has benefited by association with stronger US data. Yesterday’s blip has given some of the longer term players an excuse to add to their long CAD position. The BOC dovish position, after keeping rates at +1% earlier this week, has also helped to push the loonie to back off from its strongest level in two-years as the market digests rates being on hold and an economic recovery being threatened by a European fiscal crisis. Expect short term profit taking to remain in focus (0.9962).

A decline in Asian stocks has reduced the demand for higher-yielding assets, especially the AUD, as it tests key technical support levels after dropping the most in two-months yesterday. Data this week out of China has the market convinced that the PBOC will move quickly to hike reserve rates again and its this that has temporarily increased the appetite for the safety of the greenback and pushed the AUD away from parity. Tempering some of the AUD decline was the mix of the Chinese data. The strong growth point of view (GDP) and a softer CPI than some might have been expecting can be seen as support for the AUD on these deeper pullbacks. Domestically, the Queensland flood 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. Offers again appear on AUD rallies to 0.9900 (0.9875).

Crude is higher in the O/N session ($89.97 +38c). Crude plummeted yesterday, the most in two months, on fears that China will hike rates to combat inflation, slowing economic growth and demand for energy. They are the world’s second largest energy consumer. The weekly inventory report provided another excuse to offload oil contracts. Dealers are preempting any Chinese action. Weekly crude stockpiles increased +2.62m barrels to +335.7m. Not being left behind were gas supplies rising +4.4m to +227.7m barrels. It’s worth noting that the four week gas demand was +2%, y/y, higher and averaged +9m barrels a day. US refineries ran at +83% of total capacity, a drop of -3.4%. The supplies of distillates (diesel and heating oil) rose by +1m to +165.8m barrels vs. an expected weekly increase of +900k barrels. 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 again has topped out in the early $90’s on this run. There is far more oil in storage, more fuel capacity and more idle oil wells to limit a stronger market rally in the medium term.

Not to be left behind on the plummeting ‘scale’ was gold falling to a new two-month low yesterday, as a strengthening greenback cut demand for the yellow metal as an alternative investment. Optimism on the US economy is testing the strength of the bull’s conviction. Gold is trading in the red this month, only one month after recording an annual return of +30%. Recommendations by hedge funds to cut gold positions last week has the lemming one directional trade testing key support levels before the market witnesses a mass exodus to the exit door. The commodity also fell on speculation that China will raise interest rates to fight rising prices and thereby affecting global growth. The price erosion thus far this year has promoted some physical buying, specifically in Asian and on concerns that Europe’s sovereign-debt crisis may linger, even after the Euro-finance minister’s pledge to strengthen a ‘safety net for debt-strapped countries’. On a macro level, analysts expect the losses may be limited on concern that inflation will accelerate. Technical analysts believe that gold ($1,341 -$4.80) will outshine other precious metals in 2011 and peak somewhere above $1,600 in 2012. Current trading does not feel like it as the commodity eyes $1,300.

The Nikkei closed at 10,274 down-162. The DAX index in Europe was at 7,046 up +22; the FTSE (UK) currently is 5,898 up +31. The early call for the open of key US indices is higher. The US 10-year backed up +10bp yesterday (3.43%) and is little changed in the O/N session. The belly of the US curve printed two week high yields, as initial jobless claims fell and existing-home sales rose more than expected, supporting speculation that the economic recovery is gathering momentum. The 2’s/Bond spread widened to almost a new record (399bp) as investors demand compensation for the potential risk of inflation rising. The US Treasury also announced that they will auction $99b of debt next week, again providing dealers an excuse to make room to take down product. The strong data is again creating a choppy trading environment with medium term support levels becoming questionable (+3.50%)

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