Roll the Dice EUR Up or Down

Everyone and their mother have been telling anyone who will listen how the EUR is to go higher after the stress test results last week. It’s agreed that yesterday was a slow grind higher with no conviction. There seems to be no enthusiasm to jump on board ‘the gravy train’ just yet. The EUR is struggling to stay above the 1.30 print even thought market sentiment remains accommodating for risk. The dollar on the other hand is creeping higher across the board on expectations of stronger data this week. In broad terms, analysts want to be sellers up to 1.32, but will they get the opportunity? Not at this pace. The market seems jaded and position-less, watching equities creeping higher, waiting for the noise to begin before entering the fray. Before one knows it, they will have missed the opportunity!

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Yesterday’s US data showed that new home sales increased last month (+330k), but the revisions were significant. Sales of new single-family homes beat expectations, rising +23.6% seasonally adjusted, while y/y sales were down -16.7%. Despite the somewhat bullish headline print, revisions to May’s print were significant. It was originally estimated that new home sales plunged to +300k (lowest level in 47-years), but revised numbers revealed even weaker results, down -267k units (all-time low). Analysts note that despite last months increase, new home sales are still -21.8% below the Apr. high of +422k units (just before the first-time homebuyers’ tax credit expired). Digging deeper, one notices that the mortgage applications index is currently just above the 1997 lows, proof of a further weakness in June. The inventory of unsold houses now sits at 7.6 months with the median (-1.4%) and mean (-9.8%) price declining further. It’s further proof of the strength of the ongoing recession in the housing market. One should expect high unemployment, tight credit conditions and low confidence to keep housing activity weak for some time.

The USD$ is higher against the EUR -0.10%, GBP -0.13%, CHF -0.68% and JPY -0.39%. The commodity currencies are mixed this morning, CAD +0.11% and AUD -0.14%. The loonie continues to gain momentum, outright vs. the dollar and on the crosses, mostly on the back of a stronger commodity and equity market. The belief that Cbanks will use it as a proxy for a reserve currency status could push the currency higher in the medium term. Last week the BOF tightened rates 25bp. The interest rate differential scenario seems to be getting the biggest support for now, despite it being a ‘dovish hike’. Governor Carney stated that there was no pre-ordained path for interest rates in Canada. According to his dovish communiqué ‘the global economic recovery is proceeding, but, is not yet self-sustaining’. The 25bp hike last week will ‘leave considerable monetary stimulus in place’, with both the core and total inflation to advance at about a +2% annual rate through 2012 (within their target zone). Some will argue that with signs of a significant slowdown underway in the US, it’s possible that the BOC may be persuaded to move back to the sidelines on the Sept. go-around. Carney has given himself the latitude to step back and assess global growth for the 3rd Q.

This morning the AUD is trading well above the 90c level, its strongest print in 6-months, ahead of reports this week that is expected to give the RBA more reason to raise interest rates again. Analysts expect further strength from the currency near term, but find it unlikely to top this year’s high (0.9390) as China’s slowdown is expected to become more obvious near term. The currency has rallied a fourth straight day vs. the JPY after regional bourses advanced now that most European banks passed the stress tests and US corporate earnings surpassed market expectations. The market is also expecting a stronger CPI report this evening, which again will put the RBA under the spot light to hike rates at the Aug. 3rd policy meeting. The pace of CPI increased nearly doubled to +0.9% in the first quarter. 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’. Because of equities actions, the market is a cautious buyer on pullbacks, wary that the recent strong rally technically may be overdone (0.9033).

Crude is softer in the O/N session ($78.97 down -1c). Crude prices are trying to break through their longer term resistance levels as stronger global bourses boost speculation that the global recovery in fuel demand will be sustained. This slow upward move is like pulling teeth. For weeks the black-stuff has been confined to a tight trading range. The market has been using all the excuses to vindicate their position taking, but with the stress tests out of the way, risk appetite is being applied and should drag the commodity higher despite last weeks inventory reports. The market had been expecting a drawdown on stocks. However, not so, the data showed a surprise increase, reporting a rise of +400k barrels of oil for the week whilst the market had been expecting a headline decline of -1.6m. The dovish report continued with its gas inventories rising +1.1m barrels and its stockpiles of distillates (diesel and heating oil) doubling expectations to +3.9m barrels. Once again technically, the gas markets numbers show the strength of the ‘lackluster demand’. Overall market sentiment continues to look for vindication.

Gold has been caught in a relatively tight trading range over the past 10-trading sessions, lacking a catalyst to carry momentum to the upside again. The commodity has been fighting its technical support 100-day moving average. Prices have found it rather difficult to gravitate too far from the $1,185-88 magnet. Dealers expect investors to dump their remaining long positions on a ‘true’ break of this level. The commodity fell for a second consecutive day yesterday on signs that demand for the metal as an investment haven is slowing as the EUR continues to stabilize against most of its trading partners. Bigger picture, technically, the bullish sentiment had been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively as this is the ‘slowest’ season for physical demand. Year-to-date, the commodity has gained +7.8% and is in danger of giving up more ($1,188 +$1.00).

The Nikkei closed at 9,496 down -7. The DAX index in Europe was at 6,224 up +30; the FTSE (UK) currently is 5,386 up +36. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.00%) and is little changed in the O/N session. After printing new record low yields, the US front-end plunged on higher earnings easing concerns that the Fed may have to consider more stimulus measures to help sustain the US economic recovery. With the Treasury planning to auction $104b of new product this week ($38b 2’s, $37b 5’s and $29b 7’s), cumulatively lower that the previous two months, will certainly have dealers wanting to cheapen the curve a tad at these technically ‘rich’ low–yields. With new US home sales yesterday rising last month has also helped to pressurize the curve. Current market sentiment has dealers wanting to be better buyers on deeper pull backs.

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