EUR disappoints despite rumors of aid for Greece

With the Greeks rumored to be on the verge of being taken care of, who will capital markets ‘bully’ into submission next? Fitch yesterday indicated that the UK’s triple ‘A’ rating is vulnerable, European speculators will do no better that look across the English Channel for their next potential victim. The whole scenario is not just about Greece, albeit they are the poster boys, nor-contagion as it’s already spread, but about public and Capital Market confidence. Mind you, Greece’s striking labor force will not help their public perception any. If policy makers lose the confidence factor then they have lost the ‘game’. Bailing out Greece, where do we move on to next? Will it be the Iberian Peninsula or the British Isles? These are the EU’s ‘too big too fail’ problems. After yesterday’s price action, the market is willing to pare back some of their risk. One gets the feeling that whatever the EU decides to do and implement could disappoint as uncertainty will remain in the market. Perhaps we are back to selling equities and EUR’s?

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Forex heatmap

It was a small pleasure to see US inventories fall unexpectedly in Dec. (-0.8% vs. +0.5%), especially a month after printing the largest increase in five years. Fundamentally, it is a strong indicator that distributors had trouble keeping up with demand. Increased demand is always a good thing for analysts to report. To-date, inventories have been the scourge of this recession. After witnessing a record drawdown last year, it’s now time for manufacturers to pick up production to satisfy the anticipated future demand. Analysts believe that market efforts preventing inventories from falling too much last quarter provided ‘its biggest boost to economic growth in 20-years’. Yesterday’s announcement was a ‘brief minor’ distraction for the market as it focused on various policy makers’ rhetoric regarding Greece.

The USD$ is currently higher against the EUR -0.14%, GBP -0.17%, CHF -0.14% and lower against the JPY +0.03%. The commodity currencies are weaker this morning, CAD -0.05% and AUD -0.32%. The support is there, then its not. Houdini could not do it better. However, by day’s end the loonie happened to advance the most in a month vs. its southern neighbor on ‘speculative’ belief that the EU and its policy makers will come to the aid of Greece. Good news promotes a bigger appetite for currencies tied to economic growth. With little or no data yesterday to influence the CAD value, euphoria was provided by the rumor mongering in mainland Europe. All week, and with one eye on the ‘sensitive’ currency bets against the dollar, any market rumor is bound to have a compounding effect throughout capital markets. Not a done deal, the Greek rescue package, but a deal not worth betting against with such short odds, could provide better levels to consider shorting the CAD once again. On a cross related basis, the currency has certainly outperformed most of its other G7 members. Tomorrow’s scheduled European summit meeting is taking on a new dimension with the Greek woes front and center.

Australian data last night managed to push the currency from it five-week highs. The consumer confidence sentiment dropped -2.6% to 117 points while the home lending index declined (-5.5%) after the RBA raised interest rates a record three times late last year. Earlier this week, the currency had found a bid on the back of the RBA’s Governor Stevens said ‘holding down interest rates (3.75%) for too long may help create asset bubbles’. Also aiding the currency was the Chinese bourses finding some traction and by default giving growth currencies a leg-up after four consecutive trading days of declines. Advancing Australasian bourses act as a stabilizer for the currency. Currently the market is in limbo with respect to European actions, if any, to be implemented on Greece directly. Last week, the RBA kept rates unchanged at 3.75%, establishing a wait and see policy, as they wait to experience the true impact of the earlier hikes. Naturally, there remains a lofty rate premium built into the currency after three successive hikes (0.876).

Crude is higher in the O/N session ($73.68 up +3c). The negative correlation between the dollar and the black-stuff remained intact yesterday. Crude prices advanced just under 3%, the most in a week, as the greenback weakened vs. the EUR on ‘speculation’ that the EU will come to the aid of Greece’s budget deficit woes. Over the past two trading sessions the black-stuff has managed to crawl from a 7-week low as a weaker greenback restored some of commodities appeal for hedging inflation. Earlier this week, OPEC’s Iranian governor, Ali Khatibi, indicated that global supply was sufficient to meet demand during the first half of this year. Currently, member states are responsible for 40% of the worlds’ supply and are next meeting in the middle of Mar. to consider altering output targets. In the grander scheme of things, global demand destruction remains healthy, justified by the slowness of any rallies at the moment. This morning we get the weekly EIA report and initial expectation is for another headline build of crude. Last week, we witnessed a surprisingly large build, crude stocks advanced +2.3m barrels, beating expectations for a little change, w/w. Again for a second consecutive time, the crude print was the only bullish component of the report. Look for better selling interest on upticks.

The wave of nausea from long positioned gold traders has greatly subsided after this week’s price action. The ‘yellow metal’, week-to-date, has managed to rally from a three-month low as a temporary halt in the dollar’s advance has increased demand for the metal as an alternative investment. Analysts believe that the market was oversold with commodity prices managing to print, albeit, temporarily, a 5-month low, had bottom feeders willing to take a chance on the precious metal. With the dollar entrenched in an upward trend year-to-date technically could renew further pressure on the commodity until we witness a European resolution to the Greek budget woes. Liquidation with a purpose has nervous short term ‘longs’ on their toes. With the EUR remaining questionable and the dollar the ‘go-to’ currency for surety reasons, expect to see potential selling on upticks for the time being ($1,071), at least until the ECB say otherwise.

The Nikkei closed at 9,963 up +31. The DAX index in Europe was at 5,554 up +56; the FTSE (UK) currently is 5,147 up +36. The early call for the open of key US indices is higher. The US 10-year note backed up 4bp yesterday (3.64) and are little changed in the O/N session. Any rumblings and whispers in the market regarding guaranteed help for Greece aided traders in cheapening up the US curve yesterday ahead of this week’s first record auction. The $40b 3-year auction was poorly received. It came in at a yield of 1.377% vs. the pre-auction rate 1.357%. The bid-to-cover ratio was 2.83 compared with 2.98 in Jan and Dec. The average for the past four auctions is 3.01. Indirect bids accounted for 51% while direct bids were only 10%. It seems that nervous investors wanted to stay away from the ‘expensive’ safety of US assets. They do have appetite for FI, but not with the same urgency and certainly it seems at these elevated prices. Today we get $25b worth of 10’s coming to the market and tomorrow $16b-long bonds.

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