EURO ‘unity with promises’ broken

Bigger cracks are appearing. European cohesion is being questioned and with that the longevity of the EUR currency itself. The public perception of ‘unity with promises’ has been broken by the German finance spokesman. He stated that ‘we have to think about who has the instruments to push for Greece to restore its capital-markets access’. It’s a rhetorical question that both Trichet and Sarkozy do not like the answer to, ‘nobody apart from the IMF has these instruments’. This is not even a u-turn in EU unity from the Germans perspective, they have been adamant in their views on the Greek debacle. Providing coinage and a back-stop was not in the forefront of their rescue proposals. Attempting a Greek rescue without the IMF ‘would be a very daring experiment’. The lack of EU leadership and no European institution in place to directly tackle the Greek deficit woes continues to persuade investors to shy away from anything EURO’ish and into almost anything else. Expect a tension spill-over meeting at the EU summit next week.

The US$ is stronger in the O/N trading session. Currently it is higher against 13 of the 16 most actively traded currencies in ‘whippy’ trading range.

Yesterday’s US producer prices ‘plummeted’ on weaker gas prices as pipeline pressures remain. The overall index fell by -0.6%, vs. an expectation of only a -0.2% drop. Digging deeper, various sub-categories tried to offset each other. The energy component was much weaker than expected (-2.9%), while wholesale food prices surprised most analysts by remaining positive (+0.4%). The core-finished goods index was in line with expectations at +0.1%, again, due to offsetting variables. However, the one significant surprise in the report was in the core-intermediate goods index. It recorded its largest increase in 19-months (+0.9%). The print was heavily concentrated in chemicals and forest products. Analysts have us believing that it ‘may have been affected by the severe weather conditions we experienced last month’. Nevertheless, this pace is not expected to be sustainable in next months reading. We should expect companies ‘to hold the line on prices as the expansion has yet to soak up enough excess capacity or create jobs’. It’s no wonder that the Fed continues to preach to us ‘that inflation is likely to be subdued for some time’. Despite the ‘left of center’ headline print, today’s CPI should be close to estimates (+0.1%).

The USD$ is higher against the EUR -0.64%, GBP -0.47%, CHF -0.48 % and lower against JPY +0.25%. The commodity currencies are weaker this morning, CAD -0.25% and AUD -0.33%. It’s a runaway train when one talks about the loonie. There are too many accolades that support the currency. It’s a ‘trade’ that seems to be saturated and yet is currently showing no signs of letting up any time soon. Yesterday, the CAD recorded its strongest print in two-years, basically piggy-backing parity. With the Fed ‘keeping’ low interest rates for an ‘extended’ period of time is supporting most growth currencies as commodities remain better bid. Canadian fundamental data continues to surprise. Nominal wholesales sales rose six-times more than expected in Jan. (+3.0% vs. +0.6%), with volumes accounting for almost all of the gain yesterday. One can expect this to put upward pressure on real-GDP. This has forced traders to reconsider an earlier rate hike by Governor Carney. Trader’s opinions vary on the timing of a hike, consensus is probably July. Despite the trend remaining your friend and the Canadian Government throwing its support behind a ‘competitive currency’, the market should be looking for better levels to own the domestic currency, as this lofty heights are a tad rich. There is natural CAD resistance to be expected first time around parity.

Concerns that China will take additional steps to cool its economy have the potential to dampen demand for raw- material exports from Australia. Hence, the reason why the AUD has retreated from its two month highs already printed this week. With rumors that China is about to raise interest rates to prevent asset bubbles occurring has the AUD sliding the most in three-weeks vs. the JPY as investors exit riskier positions. Prior to the O/N rumors, it seemed the stars were lining up for a stronger AUD. Expectations for low interest rates in the US and Japan was fueling risk appetite. In retrospect, the AUD advance this week had ‘underperformed’ other currencies gains vs. the dollar as traders reflect ‘a paring in expectations for an Apr. interest rate hike following this week’s RBA board meeting minutes’. Last week the RBA hiked rates by +25bp to +4%. Governor Stevens said ‘rates should be closer to average’, which policy makers have indicated may be 75bp higher than the current +4%. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9208).

Crude is lower in the O/N session ($82.16 down -77c). Crude remains in bullish territory after yesterday weaker than expected weekly inventory headlines. The report recorded a bigger than forecasted decline in supplies of gas and distillate fuels. Gas inventories fell -1.71m barrels to +227.3m last week vs. an expected decline of only -1.2m. Distillate supplies (which include heating oil and diesel) fared no better, decreasing -1.49m barrels to +148.1m. Stockpiles were forecasted to drop by -1.35m. On the flip side, inventories of crude rose +1.01m barrels to +344m. The market had anticipated an increase of +1.15m barrels, basically as expected. Other factors have also been raining on the ‘bears’ party. OPEC decided yesterday in Vienna to keep its production limits unchanged ‘amid signs that a worldwide glut of crude is disappearing along with the recession’. Various analysts’ reports are now predicting that ‘demand for oil will recover this year, requiring additional supply’. The technical analysts are now eyeing $90 a barrel by year end. With investors believing that the economic situation will not get much worse should support commodities on most pull-backs. However, the Greek domino effect could provide some interesting support for the ‘bears’.

Despite staying close to home yesterday, the ‘yellow metal’ is expected to find some traction as investors seek an alternative to a ‘potential weakening’ of the dollar and low interest rates. Already this week, and after the Fed’s communiqué, we witnessed the commodity advance the most in a month on the ‘extended period of time’ comment. Analysts believe that with this ‘low rate environment combined with continued gold ETF interest and reduced Cbank sales’ should provide ‘strong’ support for gold for the next 18-months. Further interest to own the commodity may gain as the prospect of credit tightening in China persuades investors to seek a ‘haven in precious metals’. It seems that Europe investors want to continue to buy gold as an alternative to holding the EUR. However, the dollar’s direction remains the strongest indicator to wanting the metal or not ($1,121).

The Nikkei closed at 10,744 down -103. The DAX index in Europe was at 6,017 down -7; the FTSE (UK) currently is 5,635 down -7. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.65%) and is little changed in the O/N session. A surprising headline US PPI print had investors grabbing yield further down the curve and tightening the 2’s/10’s spread to its narrowest margin this month (272bp). The Fed’s comments this week have pushed the US yield curve lower and force Treasuries to print new high prices for this month. The Fed reiterated that the recovery will be ‘slow and that rates will remain low for an extended period of time’. Expect better buying on pull backs in the short term.

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