Is Trichet any good at liars poker?

The FX market is trading with a lack of conviction and with investors trapped in ‘no-mans land’. In a matter of days the dollar has lost its safe haven status. It’s true that US data is a tad softer, but the economic landscape just does not change that quickly, only sentiment does. This is the reasoning behind some of the violent session swings. All we have to do is identify what the ‘true economic’ trend is and then we will have trumped ‘sentiment’. This morning we get to see if Trichet will be capable of dampening the remaining market concerns over bank liquidity and stress tests. He is expected to indicate that the ECB will not tighten monetary policy, nor limit its generous liquidity provisions over the coming months. In reality, we have not seen any new fundamental data over the past 24-hours that have given us the risk-on again green light. It’s all been hearsay, but, enough for analysts and the IMF to begin to revise their growth forecasts higher…

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘whippy’ trading range.

With no US data yesterday the market awaits for Trichet this morning. In his communiqué, it’s expected that he, similar to the Fed, will point to a ‘high level of general uncertainty and warn that the de-leveraging of corporate balance sheets could persist for longer than expected’. Already this week, analysts have noted that a total of 151 Euro-zone banks tapped the ECB for $287b for seven-day liquidity (largest amount requested in 12-months). Demand has been strong since banks had to repay Eur442b in 12-month funds last week.
With rising funding costs (Euribor-0.797%), we can expect Trichet to stress that the ‘current level of excess liquidity in the Euro-zone banking system will be high enough to keep the benchmark overnight rate well below the ECB’s main refinancing rate (1%).
With a muted inflation outlook, policy makes can afford to keep rates on hold well into next year. The market however will focus on what will or will not be said about the stress tests that are designed to show how well European banks are equipped to absorb shocks. It’s rumored that the tests will include a -17% haircut for Greek Bonds. Is that enough? The market will want to be reassured that the tests are carried out ‘uniformly’ across member states and include information on exposure to sovereign debt.

The USD$ is lower against the EUR +0.07% and higher against GBP -0.09%, CHF -0.34% and JPY -0.63%. The commodity currencies are stronger this morning, CAD +0.18% and AUD +1.00%. The loonie followed equities and commodity prices yesterday. Initially starting in the black and finally ending the day on a high note as investors took on more risk. An oil acquisition/merger by Total SA may signal other additional purchases of Canadian companies have also aided the currency. However, the economic trend remains intact. Big picture, investors remain concerned that the global recovery is not being as robust as expected and will be wary of driving the loonie much higher ahead of tomorrow’s unemployment report. Market consensus expects the economy to create another +20k new jobs. However, there is a camp calling for a negative print. The loonie has been the worst performing currency vs. its southern neighbor from a basket of most traded currencies over the past month. Dealers are somewhat backing down and even questioning whether the BOC remains in a ‘normalizing’ rate mood after last months expected rate hike. Over the past few week’s the global economic landscape and attitude has definitely changed, pointing to a tough 3rd Q, and even a negative 4th Q. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. In the current environment, USD sellers may have misplaced their desired entry points and are now forced to be better buyers of the loonie on up-ticks.

There is nothing better to drag a currency higher that strong employment numbers these days. The AUD surged to a one week high as their economy added three times as many jobs than had been forecasted (+45.9k vs. +15k). With global stocks and commodities also rising, boosted the demand for currencies tied to growth. Fundamentally, there remains strong growth domestically and this is buffering the economy from any outside negative influence at the moment. The currency has already received a shot in the arm this week as Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. This is certainly disappointing the ‘doves positioning’. A strengthening job market may escalate pressure on inflation and the need to hike domestic rates again sooner rather than later. The market continues to speculate that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. With the crisis in Europe not having a material impact on the Australian economy has ‘bulls’ better buyers on pull backs. Be wary of commodity prices, market euphoria can only love the currency so long (0.8741).

Crude is higher in the O/N session ($74.76 +69c). Crude managed to drag itself higher from its 4-week low on the back of a trade group announcing that US retail sales are growing at the fastest pace in 4-years and from various positive earning’s rhetoric. Today we get the holiday delayed weekly inventory report. The market also expects a drawdown on stocks. With global equities rising has increased the appeal of commodities as an inflation hedge, for now at least. Investors are looking for a positive excuse to park excess cash into equity markets. The commodities recent weakness was in part due to the global concerns over slower growth and demand for fuel as China and the US economies showed signs of fatigue. That economic trend continues to exist. Last week’s EIA report showed that gas inventories rallied for the first time in 2-months while crude stocks fell. Supplies of distillate fuel (heating oil and diesel) also managed to climb to a two month high print. It was a market bearish report as the build in gas and distillates are offsetting the larger than expected drop in crude. Oil was down -9.8% for the quarter and -4.8% this year. Crude stocks remain well above the five-year average level, and are +3.2% above a year ago, the biggest year-on-year surplus in 6-months. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and investor confidence, with ample supply and global growth worries, speculators continue to sell on rallies.

Gold fell -3.4% last week. After falling to a 6-week low intraday, the commodity found again its sea legs and finished the day relatively unchanged. A rebound by the EUR had reduced demand for the metal as a haven. Technically, the bullish sentiment is on hiatus with profit taking testing the medium term support levels. Last month, gold rose to records in CHF, GBP and EUR’s amid Europe’s fiscal crisis. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. It’s been calculated that India, the world’s biggest consumer, imports may plunge as much as -36% this year. Despite this, on the longer term view, market concerns over global economic growth should support the ‘yellow’ metal and push prices to new record highs in the 4th Q. The upward bias trend remains intact as long as $1,175-80 holds. Year-to-date, the commodity has gained +10%. Thus far, Europeans have been content in using the commodity as a hedge against their European holdings, believing that the EUR has not bottomed out just yet ($1,202 +$4)!

The Nikkei closed at 9,535 up +256. The DAX index in Europe was at 6,015 up +22; the FTSE (UK) currently is 5,066 up +52. The early call for the open of key US indices is lower. The US 10-year backed up 4bp yesterday (2.97%) and is little changed in the O/N session. Debt prices drifted lower after equities rallied, however, worries that the US economy is stagnating curbed losses in safe-haven bonds. Investors are still trying to decide if they are witnessing a tepid US recovery from the worst downturn in 70-years or perhaps something not so optimistic. No matter what, yields will remain low for ‘an extended period of time’.

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