Welcome to the new norm? Price action has been volatile again early in Europe. The headlines that the IMF was at odds with the EU had the EUR testing the morning lows. During most of the session, Middle-east demand has been lurking and the reason cited for stop-losses been triggered on the fresh bullish follow through. Many are consoling themselves that selling the EUR remains the preferred choice into the EURO summit and that this will see topside failures soon seized upon. So far, this topside keeps moving!
Another event risk to overcome? Papandreou gets to tests his partyÃ¢â‚¬â„¢s unity for a second time in 24 hours today. Some memberÃ¢â‚¬â„¢s Ã¢â‚¬ËœwillÃ¢â‚¬â„¢ could be broken, but not the will of the general strikers. On that note, Swiss ZEW investor sentiment rose to -54.4 in October from -75.5. It provided minimal FX affect, that been left up to the Middle-east players.
This sliding EUR negativity is pressurizing the weak dollar shorts and is welcome fodder for dealers. Playing the percentages and going with the heard, the left hand side price action is preferred. It seems that positional pain has to be endured if downside objectives are to be achieved.
YesterdayÃ¢â‚¬â„¢s US housing data crushed market expectations for September, jumping +15%, to its highest level in 17-months as a surge in apartment and condo construction boosted the ailing housing sector. The seasonally adjusted annual rate of +658k beat a forecasted +590k print. ItÃ¢â‚¬â„¢s difficult to decide if itÃ¢â‚¬â„¢s good or bad news. Does the struggling US economy need more houses? WhatÃ¢â‚¬â„¢s up with the shadow inventory, foreclosed and resalable market? Compared with the same period of last year, construction is up +10.2% and as analysts put it, Ã¢â‚¬Å“construction remains below a healthy levelÃ¢â‚¬Â that would put a pace around +1-1.5m. In contrast, US building permits (an indicator for future construction) fell-5%, m/m, to an annual rate of +594k, the lowest level in five-months.
Now for inflation, unlike the unexpected surprise in PPI showing, US CPI came in Ã¢â‚¬ËœpiggybackingÃ¢â‚¬â„¢ expectations at +0.3% for September. Even better was the core-print (ex-food and energy) up only +0.1%. In translation, year-over-year, the core now stands at +2%, within the FedÃ¢â‚¬â„¢s comfort zone. Policy makers can now go back to looking at growth indicators, hoping for inspiration.
The dollar is higher against the EUR -0.24%, GBP -0.32% and lower against CHF +0.07 and JPY +0.07%. The commodity currencies are mixed this morning, CAD +0.07% and the AUD -0.18%.
Loonie resistance persists. Key dollar support levels ahead of parity seem impenetrable in this trading environment. The CAD, like other commodity and growth sensitive currency, is suffering from whiplash. Any time traders think the currency is gathering enough momentum to take on the strong dollar support levels, negative Euro rhetoric promotes risk aversion action. For most of yesterday, the loonie price action swayed with crude price. It was Sarkozy Ã¢â‚¬ËœstuckÃ¢â‚¬â„¢ comment, a few dayÃ¢â‚¬â„¢s shy of the Summit in Brussels, that took the shine off the currencyÃ¢â‚¬â„¢s recent optimism and forced quick risk-off from risk-on.
In this most important of weeks, option trading is showing that bearishness on the Canadian currency has advanced. Legitimately, the currency is again in the position to advance on the dollar highs of the week. Even domestic fundamental data is not providing the currency any support. Yesterday, the Canadian index of leading indicators fell -0.1% in September, the first decline in a year, led by declines in manufacturing.
The loonie, as it has done all week, remains vulnerable to following the broader trends, especially what is transpiring in Europe on the verbal front. The market is a good buyer of dollars on dips until European leaders are back on the same page (1.0150).
Like all risk currencies, the AUD has fallen O/N on concern that European leaders will not reach a resolution this weekend on the debt issues. France and Germany splitting on a crisis solution is sapping demand for higher yielding assets. The chance for a positive announcement for the markets is decreasing and allowing investors to lean towards a risk off mode.
However, the currencyÃ¢â‚¬â„¢s losses are limited ahead of this morningÃ¢â‚¬â„¢s US data that may point to a recovery in the worldÃ¢â‚¬â„¢s largest economy and after an RBA official indicated that the Ã¢â‚¬Å“countryÃ¢â‚¬â„¢s banks are relatively less at risk from the sovereign debt crisisÃ¢â‚¬Â. Earlier this week, the market got the RBA minutes and the final verdict seems to be neutral. The minutes mirrored the tone of their policy statement and failed to give any additional information. When it comes to cutting rates, EU holds the key and the RBA is not expected to be pro-active ahead of the G20 meeting in Caen at which Europe is due to reveal its Ã¢â‚¬Å“comprehensive policy packageÃ¢â‚¬Â.
With global markets not embracing risk, the interest to buy AUD on dips has wained, better sellers on rallies are appearing (1.0255).
Crude is lower in the O/N session ($85.48 down-$0.63c). ItÃ¢â‚¬â„¢s was a tad surprising to see oil continuing to fluctuate near a one-month high after yesterdayÃ¢â‚¬â„¢s weekly inventory headline print declining to a 20-month low as fuel demand tumbled. It took the announcement that a Ã¢â‚¬Å“splitÃ¢â‚¬Â had emerged between France and Germany on proposals to increase the bailout fund and the Fed describing the pace of economic growth as Ã¢â‚¬Å“modestÃ¢â‚¬Â to take the wheels off oil prices. The Beige book survey reported more companies expressed doubt about the strength of the US recovery.
The weekly EIA crude stocks fell by -4.70m barrels to +332.90m, and remain in the upper limit of the average range for this time of year. Stockpiles were forecast to climb +2m barrels. Not to be left behind was gas, its inventory print also moved down by -3.30m barrels, a week after decreasing -4.10m. This too remains in the upper limit of the average range. Inventories of distillate fuel (heating oil and diesel), decreased -4.27m barrels to +149.7m, the biggest drop since November. Oil refinery inputs averaged +14.4m barrels per day during the week, which were +134k barrels below the previous week’s average as refineries operated at +83.10% of their operable capacity.
After this weekendÃ¢â‚¬â„¢s summit release the market will begin turning its attention back to supply issue questions as Libya comes back online. Until then, expect investors to run into technical selling on some of these steeper rallies as they wait for a clearer idea of where we are going on the economic front.
The dollar riding higher has been doing gold no favors. For a third consecutive trading session the yellow metal is moving in tandem with riskier assets, as it has been doing all week, with nervous investors selling on a lack of progress over the Euro-zone talks and an uncertain US economic outlook. The commodity is on track for its largest decline in two weeks. The metal is not garnering the same safe-haven appeal as it did a few weeks ago. Right now, we are back to the inverse dollar-gold correlation play and the belief that a larger Euro rescue package will curb the demand for the metal as a protection of wealth.
Last months rout has left a a bitter taste in many investors mouths. Demand for Ã¢â‚¬ËœphysicalÃ¢â‚¬â„¢ gold is tentatively providing some support on these pullbacks. Under normal conditions, the Indian festival season helps drive buying from the worldÃ¢â‚¬â„¢s biggest gold consumer.
The yellow metal has moved in line with other commodities and assets seen as higher risk like equities in recent weeks, now itÃ¢â‚¬â„¢s the inverse relationship play. Gold has slumped more than-2% in the last three sessions. Fundamentally, the commodity is trying to find a balance Ã¢â‚¬Ëœbetween the two opposing forcesÃ¢â‚¬â„¢, a risk investment or a safe haven play ($1,622 down-$24).
The Nikkei closed at 8,682 down-90. The DAX index in Europe was at 5,845 down-68; the FTSE (UK) currently is 5,396 down-54. The early call for the open of key US indices is lower. The US 10-year eased-5bp yesterday (2.14%) and is little changed in the O/N session.
The FI class was not going to be left behind in the volatility stakes. Despite trading in a manageable weekly range thus far, the curve again has flattened, with the tail end outperforming. Debt prices rose as global bourses dropped after a split emerged between France and Germany on proposals to leverage EuroÃ¢â‚¬â„¢s rescue fund. Up to this point expectations had been for a positive outcome this weekend and if this is called into question and even with $7bÃ¢â‚¬â„¢s worth of indexed-bonds on offer today, the market will be in demand on these pullbacks.
As the weekend draws closer all asset classes will remain susceptible to Euro rhetoric, and any negativity towards a Euro solution will have investors wanting to unwind the last of their risk positions.
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