EURO bears to relapse before NFP

Why do we continue to look to Europe for sovereign debt concerns? The way US treasuries have been performing, the Obama administration could be staring down a ‘failed auction’. Treasury yields have backed up 90bp in three-month’s in a ‘destabilizing fashion’. Looking at the basics, global growth and especially US growth has not been strong enough to revive fears of inflation. Commodity prices seemed to have already peaked and the housing market continues their ‘death spiral’. In this scenario, how are stocks holding on to its one-directional play? Something seems to be is amiss. The FX market is still very much ‘short’ the crowded trades, EUR’s and GBP. Bearish momentum has gone ‘walkabout’ at the moment. We could witness some ‘nasty’ trimming of positions to the top side on Thursday ahead of the ‘strongly’ anticipated NFP print (+190k-thus far).

The US$ is mixed in the O/N trading session. Currently it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s US data confirms that the consumer is officially saving less (+0.0% vs. +0.1%) and spending more (+0.3% vs. +0.4%). It was not an income driven gain, as disposable income was flat in Feb. after declining in Jan. From its peak last spring (+6.4%), the savings rate has been halved (+3.1%). Analysts note that the headline nominal rise in spending matched the real rise and is expected to flow directly into GDP. Digging deeper, the real-gain in consumption was focused on non-durables and services. Real-personal income (ex-transfer receipts) is one of the main go-to indicators to ‘determine the beginning or end of a recession’, happened to fall -0.2%, m/m. It was a second consecutive monthly decline. The personal income components (labor, earning’s, rental etc.) revealed that weakness was evenly spread, similar showing in the private-sector compensation. Analysts note that income was somewhat ‘cushioned’ by government transfers. Not surprising to witness that inflation was again absent, the core-rate of inflation in personal consumption expenditures was flat for a second consecutive month. Further proof that growth (equities), inflation and US bonds yields backing up is not making much sense at the moment.

The USD$ is lower against the EUR +0.25%, GBP +0.47%, CHF +0.19 % and higher against JPY -0.06%. The commodity currencies are stronger this morning, CAD +0.20% and AUD +0.26%. The loonie is back on the commodity gravy train. All the stars are in alignment, as optimists seem ok with the Greek debt offering, equities are in demand and the investor is looking or hoping that we are now entering an expansion phase. These are all good reasons to want to own a growth commodity driven currency like the CAD. Last week the loonie happened to record its first weekly loss in a month. This ‘one directional oversaturated’ CAD trade, managed to weed out the weak domestic longs when the dollar rallied for risk aversion reasons. The currency continues to outperform many of its G7 currencies. The loonie is hanging in tough, two weeks ago it was piggy-backing parity and by this weeks price action it looks capable of doing that again sooner rather than later. The currency continues to remain a good news story with strong fundamentals. To date the USD rallies have been shallow and are met with strong resistance. The trend remains your friend.

The gravy train rolls on. The AUD remains in robust form, advancing the most in six-week’s as investors demanded yield. The spread between Aussi bonds and US treasuries has widened to its biggest spread in almost two-years. Growth currencies continue to perform well vs. JPY, testing some key resistance points before the next leg higher. Stronger fundamentals are adding to speculation that the RBA will increase borrowing costs again next week after Governor Stevens’ comments. Futures traders are pricing in a 50% chance of a 25bp rate increase (4.00%) when the RBA next meet on April 6th to contain inflation. The RBA rhetoric is providing the support, reiterating that the benchmark borrowing costs need to climb toward ‘normal levels’ to contain inflation. The policy member’s comments reinforce the fact that the Australian ‘is in a strong position economically and there continues to be inflationary price movements’. Continue to expect better buying on deeper pull backs (0.9204).

Crude is little changed in the O/N session ($82.16 up +1c). ‘Reversal of fortune’ was not just a movie. It also applies to how crude prices have acted over the last two trading sessions. After ending last week ‘down and out’, oil prices have advanced, supported by a weaker greenback and a tentative equity rally. The buck has greatly underperformed vs. the EUR, especially after Sunday’s s/l hunting. This has dragged most commodities higher. With the Euro-zone economic sentiment increasing, coupled with US consumer spending rising, is trying to dissuade the bears from their course of action, especially after last week’s EIA report showing a bigger than forecasted increase in inventories. Crude stocks increased four-fold, rising +7.25m barrels. The market was only expecting an increase of +1.65m barrels. Compounding the net effect, imports of the ‘black-stuff’ gained +12% to +9.4m barrels (the highest print in 6-months). On the flip side, gas stocks fell -2.72m vs. an estimated drop of only -1.5m barrels. Not to be outdone, distillate fuel (heating oil and diesel) declined -2.42m barrels to +145.7m. A decrease of -985k barrels was forecasted. The four-week US demand average was +19.36m barrels a day, up +3.6% y/y, while gas consumption averaged +8.95m barrels, up +1.2%. Finally, refineries are operating at +81.1% of capacity, up +0.6% w/w. On the face of it, there is plenty of spare capacity available for when demand picks up. Technically the market remains somewhat optimistic, while fundamentally, weak demand has us not so. Capital markets anticipate another build of inventories this week which should provide some resistance to prices.

Despite gold prices remaining contained in a tight trading range, albeit somewhat volatile, a weak greenback has sparked demand for the metal as an alternative asset. The intraday trading has certainly caused some traders to suffer from price ‘whiplash’. Analysts believe that from a macro perspective ‘the underlying problems of the heavily indebted euro-zone economies are overshadowing everything at the moment’ and have investors both gun shy and trigger happy when coming to execution. Fundamentally, it’s been expected that the ‘yellow metal’ would find stronger traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. However, the market is seeing little evidence of that demand appearing just yet. There remains strong support at $1,075-80 level. What about the IMF? Will they require selling gold to finance a Greek bailout? The commodities highs are getting lower and suggest that further weakness is warranted in the short term. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,112).

The Nikkei closed at 11,097 up +110. The DAX index in Europe was at 6,160 up +3; the FTSE (UK) currently is 5,711 up +1. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.87%) and is little changed in the O/N session. Treasury prices had a rough go of it last week with supply managing to push yields to a record three-month high. A lower than average demand for $118b’ worth of product raised concern that investor interest is declining as the US deficit climbs to a record. Are we in the midst of a failed US auction? Technically and fundamentally, supply and the realization that there are more issues to come are starting to continuously weigh on Treasuries. The US marketable debt has risen to a record $7.4t, as the Obama administration borrows to sustain the US economic expansion.

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