We are still in a market that is trying to identify the EUR ‘move’ and not the overall ‘correction’. We know Capital Markets sit on record shorts. It’s a tenuous position to have. At times when the markets lean so heavily on a one-sided trade, the short term whiplash affect tends to hurt. The EUR’s ‘correction’ is being dominated by the markets biggest investors’ movements. Are Cbanks reserve managers having doubts about their EUR holdings as the crisis highlights ‘the flaws in the currency’s structure’? Russia has trimmed its reserve holdings from 47.5% to 43.8%. Iran and South Korea are rethinking their reserve policy strategy. It was only 12-months ago that the EUR was touted as the next reserve currency, overthrowing the dollar. Today the world cannot get enough of the greenback, so much so that a stronger dollar is another reason why US interest rates will remain at zero for longer than the markets currently expect. Germany prohibiting naked short-selling on government bonds with CDS in an effort to calm the Euro-zones financial markets has backfired, and only ‘heightened anxiety about deeper regulation’. It seems that banning CDS is a poor substitute for the policy changes that are required to deal with the ‘fiscal and structural problems that give rise to inflated CDS prices’.
The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in another ‘volatile’ trading range.
Yesterday we witnessed US housing starts improving again in Apr. (+0.672m vs. +0.65m), its highest level since Oct. 2008. The demand for new and existing houses has rebounded this quarter mostly on the back of the government tax credit and prevailing low mortgage rates. Analysts believe that the uptick in demand will be maintained throughout the summer and eventually taper off as we head into the autumn when demand deteriorates amid weaker government support and rising borrowing costs. Digging deeper, most of the gains were in the single-family starts (+10.2%), while the multi-family category continues to remain volatile. Other data showed that housing permits plunged -11.5%, with weakness in both the single and multi-family sectors. This may lead to a pull back in the construction numbers for this month. However, May’s robust homebuilders’ confidence report could prove otherwise.
The US Producer Price data is showing signs of price pressure and unexpectedly declined last month (-0.1% vs. +0.1), after the revised gain’s in Mar., on the back of weaker gas and food prices. Ex-food and energy, the core actually advanced (+0.2%), which is strong proof that price pressures lurk beneath and are not currently passed on to the consumer. Depending on the economic and financial uncertainty in Europe, price pressure may continue to exist with volatile commodities.
The USD$ is higher against the EUR -0.11%, GBP -0.04%, CHF -0.11% and lower against JPY +0.46%. The commodity currencies are weaker this morning, CAD -0.54% and AUD -1.05%. Questions about growth and commodity prices greatly pressurized the loonie again yesterday and O/N. Early in the session the currency managed to find some traction on news that the ECB purchased +16.5b EUR’s worth of bonds through May 14th. However, the concerns that the new European austerity measure that are being implemented will eventually cut the prices of raw materials that Canada has abundance of ended up hurting the loonie by day’s end. On a cross related basis the CAD continues to find strong buyers and has managed to print a 9-year high vs. the EUR as investors seek surety in a currency that has strong fundamentals. It’s worth noting that the aversion trading strategies that historically require purchasing of the USD in abundance and selling of the loonie are being ignored somewhat. The dollar has been in demand vs. most of its other major trading partners and not against its largest. Technical analysts have noted that the greenback wants to grind higher for surety reasons despite the threat of Canadian interest rate hikes. It seems that Canada’s strong fundamentals coupled with a ‘rapid’ gold market is bringing loonie buyers on dollar rallies back into the market. Loosening risk aversion will only promote the currency even more.
It’s not surprising with the doubt that the markets are experiencing in the EU/IMF accord that growth currencies have retreated from their initial euphoric high recorded earlier this month. Despite the AUD gaining some support last week from a stronger job’s report (+33.7k vs. +22k), the currency has fallen for a fifth consecutive day against the JPY on concerns that the deficit-cutting measures by EU will eventually inhibit global economic growth, and by default reduce demand for higher-yielding assets. A possible slowdown in China is undermining confidence that a ‘revival in growth is sustainableâ€. The AUD also slid to an eight-month low as consumer confidence ‘tumbled by the most in 19 months’ (108) (0.8449).
Crude is weaker in the O/N session ($68.01 down -140c). Oil tried to snap five days of consecutive declines and rally from its 5-month low yesterday. Alas, it was in vain as Germany banning of various bearish investments only fueled concerns that the region’s debt crisis will worsen. Last week’s EIA inventory report showed that stocks climbed for the 14th time in the last 4-months as refineries had various units lay idle. Supplies of crude increased +1.95m barrels to +362.5m vs. a forecasted climb of +1.6m. Inventories at Cushing increased +784k barrels to +37m (the highest level in 6-years). Not helping the cause, refineries operated at +88.4% of capacity, down -1.2%, w/w, the first decline in two months. On the flip side, gas inventories managed to fall, down -2.81m barrels to +222.1m. The US economy and the dollars strength and not oil fundamentals have driven the market to date. The IEA has again cut its estimate of world oil demand this year by -220k to +86.4m barrels a day. According to the same organization, OPEC will need to pump +28.7m bpd to ‘balance global oil demand and supply this year’, that’s -400k barrels less than last month’s estimates. The market is relying on fundamentals and the oversupply of the commodity to dictate prices. Let’s see what the stock report brings as sellers remain on upticks.
Gold rebound from their lows during yesterday’s afternoon session as investors remain concerned about the sovereign debt problems in the euro-zone. However, it seems that in the O/N session profit taking is the same of the game as investor’s ‘cash in’ covering other bad investment moves. The market is weary of the EU/IMF loan accord to bail out indebted Euro-nations, believing that the monies promised may not be enough to contain the sovereign debt crisis. Investors are speculating that the EU/IMF agreement could ‘cement easier monetary policy’ and promote inflation. Europeans it seems want to be in the ‘currency of last resort’ and are using the commodity as their second reservable asset, supplementing their EUR denominated assets. Others have outright been liquidating their EUR holdings and buying gold ahead of a possible ‘dissolution of the monetary union’. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on pull backs ($1,216).
The Nikkei closed at 10,186 down -56. The DAX index in Europe was at 5,977 down -178; the FTSE (UK) currently is 5,164 down -142. The early call for the open of key US indices is lower. The US 10-year eased 8bp yesterday (3.40%) and another 7bp in the O/N session (3.33%). The treasury bears have been back peddling and revising year-end yield targets. The excuse, the Europe’s sovereign debt crisis ‘did not appropriately discount the sovereign risk conditions’. Treasuries prices have continued to climb as demand for the ‘safest assets’ rise on speculation that Europe’s sovereign-debt crisis will limit their growth and eventually inhibit other regions. The FI asset class price action is volatile and rates continue to be driven by the EUR.
