EUR-Sell-No Wait Buy-Off That!

Time to vote. The market appears poised with their fingers on the sell button. Sell, sell, sell, seems to be the final solution on Prime Minister Papandreou’s austerity measures passing. There is no official set time for the vote and it only requires a simple majority of present members of parliament to pass.

A successful outcome would clear the way for the disbursement of the EU/IMF €12b loan tranche next month. While this would likely bring some near-term relief, the markets will focus on the country’s 2012 funding schedule and on the ongoing negotiations of a debt exchange program.

With the markets grappling with the French/Greek roll-over plan, ECB member Stark, this morning, has already put cold water on that initiative. He notes that the ‘Brady-Bond style solution would be a violation of the EU’s no bailout clause’ rejecting the idea that banks could exchange Greek debt for paper guaranteed by the EU states. As Fitch say’s ‘if it looks like a default, we will rate it as a default’.

Social unrest and diminishing optimism about EU banks to roll over this debt can only stave off imminent default. Where is the long term solution? The EUR remains vulnerable to headline risk.

The US$ is a weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in a ‘subdued’ session ahead of the Greek vote.

Forex heatmap

Yesterday, it was not a surprise to see S&P’s Case-Shiller house price index for April fall-4%, y/y, on the 20-city index. The data extended its trend of deterioration, dating back twelve months, when prices remained supported by a temporary buyer’s tax credit. Analyst’s note that the price data released with May’s existing home sales report suggests the improvements in S&P Case-Shiller monthly data towards ‘less negative’ may extend into ‘neutral’ or ‘marginally positive’ in May. Housing data this week again focuses on how weak the market remains, yesterday’s release shows noting more than a hint of stabilization, rising +0.7%, m/m, before being seasonally adjusted to reveal a -0.1% decline.

An early leak of US consumer confidence did no one any favors. The index fell for a second consecutive month in June (58.5 vs. 61.7). The initial glimpse of consumption activity suggests that next months release offers nothing uplifting, it just reaffirms the current theme. Analyst’s continue to seek the good in these reports and the fact that May’s confidence did not fall as much as originally thought, coupled with this months decline with about 1pt less than May’s monthly change, indicates ‘decelerating pessimism as opposed to growing pessimism’. It’s a stretch!

Finally, Richmond Fed manufacturing index turned positive yesterday, rallying from-6 in May to +3 in June. Due to supply disruptions from Japan cutting into production has led the manufacturing sector to have a ‘rough go of it of late’ (NY and Philly Fed). With the Richmond Fed’s index improving, indicates that activity is again expanding. Analyst’s note that the index of overall activity steadied, as a slightly positive reading for new-orders coupled with solid employment growth offset a slightly negative reading for shipments. Looking ahead, manufacturers in June were more optimistic about their future business, looking for solid growth in shipments, capacity utilization, new orders and capital expenditures over the next six-months. This Friday’s ISM release should give us a better snapshot on how the sector is doing.

The dollar is lower against the EUR +0.09%, GBP +0.05%, CHF +0.01% and higher against JPY -0.05%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.47%.

The Canadian dollar, despite trading within its recent tight range, continues to inch higher, touching a two-week high this morning ahead of inflation data. For the first time this week the currency caught a break yesterday. Hopes of progress in the Euro-zone’s bailout negotiations gave the EUR a boost, along with a rise of general risk sentiment, which in turn has temporarily supported the higher yielding growth currencies like the loonie.

Last week, the CAD posted its biggest weekly drop in two-months as risk-averse investors sought refuge in the most liquid of assets, the greenback. Even with softer global data and Canada’s close ties with the US, the currency has held in very well outright versus the dollar, but underperformed on the crosses. The North American currency pair needs to play catch up.

With the Fed cutting its growth objective for the remainder of the year will have higher yielding growth sensitive currencies trading under pressure. Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. CAD is vulnerable now with US data likely to continue to print weak into mid-July (0.9783).

The AUD rose against most of its major counterparts on speculation that the Greek parliament will approve a package of austerity measures today boosted demand for higher-yielding assets. The currency advanced for a second consecutive day against the dollar as traders pared bets on a cut in interest rate by the RBA. Investors have been buying equities, commodities and risk currencies, based on a belief that the passing of the proposed Greek austerity measures would see a large degree of fear and anxiety dissipate.

Gains have been capped on fear that that a Greek austerity plan will not resolve Europe’s sovereign-debt crisis. Technically, the market is waiting for funding schedule clarity. Concerns that global growth is slowing has prompted some investors to bet that the RBA will cut interest rates some time this year. Governor Stevens may reduce his benchmark rate by 19bp over the next 12-months, compared with bets on a +25bp hike on June 1.

Currently, the market is pricing a no hike in August unless inflation and employment surprised on the upside and the situation in Greece clears up sufficiently for a powerful rebound in risk appetite. Global data needs to improve before we can embrace any rate hike policy thinking. Investors remain better sellers on rallies (1.0597).

Crude is higher in the O/N session ($93.38 +0.49c). Similar to gold, oil prices have rise from a four-month low amid speculation that the Greek parliament will approve austerity measures to prevent a default on the country’s debt later this morning and on expectations that fuel demand will rise ahead of the long weekend in the US. July 4 historically marks the peak consumption period for US motorists.

Previously, ‘tightness in the oil market has threatened to undermine the fragile global economic recovery’. The IEA said its members would release crude from their SPR’s to ease some of the market tension. Year-to-date, unrest in the crude-producing Middle-East and North Africa has sparked hefty price gains and causing Brent and WTI to widen to record levels. According to analysts, this supply move is significant, as it ‘represents a reach by member countries for the remedy of last resort to high oil prices’. The spike in energy prices is being cited ‘as the reason for the economic slowdown and this is a reaction to that’. Analyst’s note, that from its peak this year, crude is off-20%.The technicals see strong support first appearing at around $87.

Gold rallied for the first time in four days yesterday on concerns of the Greek debt crisis boosted demand for the yellow metal as a protection of wealth. Last week, the commodity fell $50 after a pledge by EU officials to stabilize the region’s economy slashed demand for the commodity as a haven. Margin calls in other asset classes also required investors to raise fresh capital by selling the yellow metal.

Gold is viewed by some investors as a hedge against inflation, and the surprise release of crude oil stockpiles last week from developed nations’ reserves has dampened sentiment amongst investors for rising prices. The commodity could still see a strong pullback if the Greek austerity measures win parliamentary approval later today. It would likely reduce short-term investor concern and demand for safe-harbor assets.

Commodities dependency on the buck and the outlook for US rates is likely to remain intact for now. This ‘one directional trade’ is far from over, with speculators continuing to look to buy the metal on these deep pullbacks ($1,509 +$8.80c). Technical analyst’s see $1,485 as the first level of real support.

The Nikkei closed at 9,797 up+148. The DAX index in Europe was at 7,254 up+85; the FTSE (UK) currently is 5,825 up+58. The early call for the open of key US indices is lower. The US 10-year backed up 11bp yesterday (3.04%) and are little changed in the O/N session.

The US yield curve rose from almost a record low ahead of this week’s three-treasury auctions ($99b-2’s, 5’s and 7’s), on bets that the Greek Socialist Party will get parliamentary approval for its austerity measures needed to secure a troika bailout this morning.

The US 10-year benchmark was able to back up for a second consecutive day amid speculation that the EU will take action to prevent a Greek default. The market to date has seen a steady grind to lower yields without a significant pullback. Investors seem to be waiting for the ‘storm to pass until there is some clarity from Greece’.

Yesterday’s US 5-year issue failed to garner the demand seen in previous auctions. It was a bad auction, showing that the sharp drop in yields is starting to turn off investors. Bond prices hit session lows making investors nervous ahead of today’s final auction of the week ($29b 7’s). The issue tailed +2.75bp at a record low yield of 1.615% vs. +1.587%. The tranche had a 2.59 bid-to-cover ratio compared to an average cover of 2.81 in the six-prior auctions. Indirect bidders took +37.6% of the issue (the smallest take down in three-years) versus an average of +40.4%. Today, we get to take down +$29b 7-years.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell