The USD$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another Ã¢â‚¬ËœwhippyÃ¢â‚¬â„¢ trading range. No surprises out of left field were to be had yesterday from US data. The housing market continues to stumble. Existing home sales dipped back down last month after been held up in Feb. (4.93m vs. 5.03m). This may be explained by a run-up in prices, with median prices increasing +2.6%, m/m, while average prices jumped +2.4%, m/m, the first increase in three months. One should expect prices to continue to fall as the large inventory overhangs are worked through. Total months’ supply moved back up to 9.9 months after falling in Feb. The EUR surpassed the psychological hurdle of 1.60 yesterday after ECB officials said they would act to restrain consumer prices if inflation does not slow. Rhetoric from Euro-land policy makers remain persistent and consistent and can only provide more ammunition for a stronger EUR over time. Earnings reports and further write-downs by tier 2 banks in the US should continue to weigh heavily on the future value of the greenback.
The US $ currently is higher against EUR -0.15%, GBP -0.05%, CHF -0.32% and JPY -0.18%. The commodity currencies are mixed this morning, CAD -0.05% and AUD +0.85%. BOC governor Carney got his 15 mins of fame and slashed O/N rates by a market consensus 50bp yesterday to 3.00%. The accompanying communiquÃƒÂ© was in most peoples eyes very dovish and strongly implies that this will not be the final rate cut. The Bank noted that the Ã¢â‚¬Ëœsharp slowdownÃ¢â‚¬â„¢ in the US has caused global growth to also backup. This has been the reason for a decline in Canadian net exports, which has offset strong domestic employment. Their previous statement indicated that the US would have a deep, protracted slowdown and yesterdayÃ¢â‚¬â„¢s announcement went further. Policy makers said that they now Ã¢â‚¬Ëœprojecting a deeper and more protracted slowdown in the US economyÃ¢â‚¬â„¢ (another way of saying further easing). On a technical basis look for the loonie to under-perform through the crosses. If EUR/CAD penetrates 1.6200 due to interest rate differentials, the market opens up to the top-side of 1.7000. The AUD$ reached a 23-year high O/N (0.9538), on the back of a government report showing that CPI prices rose at the fastest annual rate in 7-years (1.3% vs. 0.9%), thus fueling speculation that the RBA will be in a position to hike rates again (7.25%).
Crude is lower O/N ($117.90 down -17c). The geo-political issues have not changed O/N pricing and continue to provide market guidance, while technical analysts take a back seat. Disruptions in NigeriaÃ¢â‚¬â„¢s delta and strike threats in a UK refinery coupled with OPEC being adamant that it will not change production levels has the black stuff encroaching on the psychological $120 a barrel. OPEC will raise production, but in 2012! They believe if they did so now, they would not find people to buy the Ã¢â‚¬ËœincrementÃ¢â‚¬â„¢. Fundamentally the market is tight and speculators continue to prefer commodities returns over both equities and FI class. Traders are predicting an uptick in energy demand for the second half of the year as the summer driving season is nearly amongst us (Memorial Day in May through to US Labor Day in Sep.). This morning the market will focus on the EIA inventory reports. The data has flat-footed the market in recent memory. Last weeks oil inventories fell -2.36m barrels to 313.7m and refineries are operating at 81.4% of capacity (lowest level since hurricane Katrina and Rita). Lower refinery margins (crack spreads) continue to reduce the incentive of refiners to process oil into products, which of course would include gas and diesel fuel (hence gas prices are falling behind oil price pacing). The overall tone of Gold remains robust ($921) as energy costs continue to surge, coupled with greenbacks struggling in general vs. the EUR has boosted the appeal of the yellow metal as a hedge against inflation.
The Nikkei closed at 13,579 up +31. The DAX index in Europe was at 6,754 up +26; the FTSE (UK) currently is 6,038 up +4. The early call for the open of key US indices is higher. Yields of the US 10-year bond eased 2bp yesterday (3.72%) and are little changed O/N. The front end continues to under-perform and flatten the curve (154). Two-year notes yields rose to their highest level (2.18%) relative to the FedÃ¢â‚¬â„¢s O/N (2.25%) as traders pare expectations for additional reductions in borrowing costs by the Bernanke and his team. Futures traders are pricing in an 86% chance of a 25bp ease only, that was the same percentage last week for a 50bp cut.
This morning Euro-land data lends further support to recent Euro policy makerÃ¢â‚¬â„¢s rhetoric. Growth in the European service industries (PMI) unexpectedly accelerated (51.8 vs. 51.6), thus providing more ammunition to raise interest rates (4.00%), which will only weigh on the greenback as interest rate differential kick in (the EUR has appreciated 9% vs. the USD$ this year). By the way, the score was 7-2 in favor of a 25bp (5.00%) cut by the BOE, surprisingly only one member wanted to go deeper (its coming).
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