Euro Roundabout

Despite Japan entering a recession, Strauss-Kahn resigning, Trichet stating that the ECB would not be using Greek bonds as collateral should there be a decision to lengthen debt restructuring, we continue to see a consolidation phase after the heavy liquidation of short dollar positions this month. The market is begging to break out of the recent ranges.

Big picture, the market remains tentative and will be looking towards US claims numbers this morning for some sort of guidance. A headline print in line or better than consensus (+421k) should be supportive for risk trades, and the CAD and MXN in particular. A positive print should be capable of pushing US front-end yields higher, and support those long dollars versus yen positions despite the hiatus in T-bill issuance this week. Otherwise, we are back to that reality show, policy makers versus politicians.

The US$ is stronger in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘orderly’ morning session.

In the FOMC minutes there was little different to what Bernanke commented in his post press appearance. Perhaps this release will become non-influential. The FOMC meeting showed that monetary policy tightening is still far down the line. Concerns about inflation were present, but with the dominating view still being rising energy costs are ‘transitory’. While the minutes showed participants discussing the Fed’s exit policy and would point towards policy tightening as the next policy move, there has been no time line discussed and the next policy move could still be some time away.
 
The USD is higher against the EUR -0.19%, GBP -0.04%, CHF -0.23% and JPY -0.22%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.12%.

Canadian wholesale trade yesterday was weighed down by lower import prices (+0.1% vs. +1.2%) which provided for a disappointing report. Digging deeper, the details were mixed as lower import prices weighed on several categories. Analysts however tried to put a small positive spin on the data, noting that wholesale volumes increased during the month, which should provided a boost to first quarter economic growth. The market now waits for retail sales to be reported before we get a peek at an anticipated stronger growth scenario. Three of the seven subcategories saw declines, equipment and supplies (-0.6%), personal and household goods (-0.5%) and food and beverage (-0.4%).  The gainers were motor vehicle (+0.6%), farm products (+0.2%) and the miscellaneous category (+2.3%).Also of note, inventories climbed +0.4% in March (the third consecutive monthly gain).  

With the rate market continuing to push out BoC hikes is making the top side for the loonie outright more vulnerable. The currency this week has traded heavily against most of its major counterparts and at times been within striking distance of its two-month low outright. Until now, the pressure on commodities had been undermining the loonies’ progress, now investors have shifted their focus back to ‘rate’ watching. The Bank next meet on the 31-May to determine their interest rate policy.

With 0.9800 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. Not helping the currency is the market waiting for Canadian inflation data tomorrow before committing to larger CAD positions. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9673).

The perception that the worse of the commodity sell off may now be behind us, has the Aussie dollar doing better in the O/N session, supported by the uptick in the Asian equity class.

Earlier this week, the currency was pressurized by Australian consumer confidence declining this month to the lowest level in almost a year. The Westpac sentiment index fell -1.3% to 103.9 from a month earlier. Not helping either was Moody’s downgrading the long-term, senior unsecured debt ratings of some of its leading domestic banks.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0646).

Crude is lower in the O/N session ($99.69 -0.41c). Oil prices climbed yesterday after the weekly EIA report showed an unexpected drop in US inventories, as refineries boosted operating rates and imports declined. For most of this week crude prices have been vulnerable to the downside on worries that global economic growth is stalling.

Weekly crude supplies fell-15k barrels to +370.3m last week versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices. The IEA is considering cutting their global demand numbers again, as this year’s price rally begins to weigh on consumption. Thus far, they have reduced its estimates for world consumption by-190k barrels a day.

After falling to a one week low in the earlier session, gold rallied the most this month yesterday, as commodities rebounded, boosting the appeal of the precious metal as a hedge against inflation. The modest decline of the dollar has also aided in boosting commodity prices.

With the risk factor coming back to commodities tentatively, investors want to diversify away from the dollar and own precious metals. The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,489 -$6.10c).

The Nikkei closed at 9,620 down-41. The DAX index in Europe was at 7,346 up+44; the FTSE (UK) currently is 5,955 up+32. The early call for the open of key US indices is lower. The US 10-year backed up 5bp yesterday (3.17%) and is little changed in the O/N session.

Treasuries have fallen, pushing the 10-year yield up for the first time this week as equities and crude rallied and investors found less value in owning US product after the yield dropped to its lowest level this year. With the lack of economic data out yesterday it was difficult to commit to owning product at these rich levels.

Mixed US data this week has investors remaining better bid on these pull backs, providing bullish momentum for the FI asset class who it seems want to register even lower record yields over the medium term.

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