Trichet’s EUR fights for survival

[mserve id=”Central_Bank_ECB_Jean-Claude_Trichet.jpeg” align=”left” width=”400″ caption=”ECB President Jean-Claude Trichet” alt=”European Central Bank President Trichet” title=”ECB President Jean-Claude Trichet”]

There is only one story in town and like a broken record, its playing the same tune. Liquidation of Euro assets seems to be gathering momentum. The currency has continued its slide following various statements that there will be no Greece solution at this weeks EU summit. Domestically, leaders are fighting their ‘own’ battles of political survival and at the same time finding a Euro solution is taking its toll. The market has its sights set firmly on a 1.3000 print. The underlying stories are intriguing. Thus far, the EUR weakness has pushed the EUR/CHF to new historical lows. Hildebrand and his policy makers at the SNB said that they would counter a rise in the franc with a ‘broad arsenal’ to prevent excessive gains. The market is now testing their might, words are not in play. Every EUR plunge has the market expecting the SNB to draw their ‘new line’. Their presence, whenever, should cause some ‘real’ impact. But, how long will this impact be?

The US$ is stronger in the O/N trading session. Currently it is higher against 15 of the 16 most actively traded currencies in a ‘volatile’ trading range.

Forex heatmap

Yesterday’s data provided some mixed results in the US, and in ‘themselves’ provided little impetus for the dollars movement. The FHFA purchase-only house price index was a little weaker than the market had expected (-0.6%). More importantly, the Dec. decline was revised from -1.6% to -2.0%. On these headline prints, analysts are now expecting the Case-Shiller measures to ‘be skewed to the downside’. The latest data leave the FHFA index with a y/y decline of -3.4%. The Richmond Fed factory survey was in line with expectations for this month, with both the headline (+6) and ISM-weighted indexes improving (52.9). It’s worth noting that ‘this’ specific regional survey has been one the weakest and has struggled to enter positive territory. However, this month’s data is narrowing the gap. Finally, the existing home sales report for last month was inline with expectations (+5.02m vs. +5.01m), with sales essentially flat following two big declines after the expiration of the original first-time buyers credit. Analysts believe that the ‘impending end of the extended credit next month could potentially support sales over the next few months’. But, to date there has been no sign of that. The median price of an existing home edged up +0.1%, but, the y/y comparison, which was reported flat in Jan., slipped to -1.8%. The median price remains 28% below its July 2006 peak. Inventory remains a problem with months’ supply rising from 7.8 to 8.6, and is more than two-months above their low from Nov. A larger percentage of distressed units have not even entered the market yet.

The USD$ is higher against the EUR -0.55%, GBP -0.43%, CHF -0.44 % and JPY -0.27%. The commodity currencies are weaker this morning, CAD -0.09% and AUD -0.29%. Despite Canada’s leading indicator coming in softer yesterday (+0.8% vs. +0.9%), the growth momentum remains alive for the ninth-consecutive monthly gain. The expansion headline print certainly is supportive of a 4th Q GDP growth (+5%) repeat in this 1st Q. As expected, housing led the way, rising +1.7%, m/m. The gains were in starts as re-sales declined for the first time in 12-months. The CAD continues to remain a good news story with stronger fundamentals, equities and commodities pushing the loonie higher. Any dollar reprieve has the Canadian dollar bulls adding to their positions. To date the USD rallies have been shallow and continued to be met with strong resistance
Fundamentally, after stellar reporting this month it’s difficult to continue to argue that ‘emergency’ rates in Canada are still warranted (+0.25%). The market now believes that there will be a forceful move on rates sooner rather than later. Despite the trend remaining your friend, the market should be looking for better levels to own the domestic currency.

The AUD managed to weaken for the first day in three vs. the greenback as the EUR dropped to its lowest level in nearly 12-months after the French and German leaders agreed that an aid package to Greece would require help from the IMF, thus undermining confidence in the existence of the EU. Declines in the AUD were somewhat limited after a government report showed that the skilled job index rose +2.4% this month. Lower commodities and equity prices has pared demand for higher-yielding assets. With rumors that China is about to raise interest rates to prevent asset bubbles occurring has the AUD bulls trading cautiously. Prior to these 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. The market expects the RBA to hike with a ‘gradual approach’. Continue to expect better buying on deeper pull backs (0.9123).

Crude is lower in the O/N session ($80.84 down -100c). Oil prices mostly gyrated around its opening print yesterday as investors sought stronger evidence to support their convections. This morning we get the weekly inventory report, which is expected to show another increase in stocks w/w. Crude prices remain questionable, albeit in a volatile intraday trading range. There is heightening concerns for sustainable global growth. Technically the market remains optimistic, while fundamentally weak demand has us not so. In reality, US demand is better y/y, but we are still some ways from calling it as ‘tight’ demand. The bullish price print last week was fuelled by the 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. Distillate supplies (heating oil and diesel) fared no better, decreasing -1.49m barrels to +148.1m. On the flip side, inventories of crude rose +1.01m barrels to +344m. Price action is contained in a tight trading range, where supply and demand issues are not ‘the primary movers of this market’. The greenback is the strongest influence, and Capital Markets skepticism that EU leaders will agree on an aid package for Greece later this week continues to weigh on commodity prices. Technical analysts have not been dissuaded from achieving their $90 a barrel by year end. For now, the dollar’s rise is providing a commodity price ‘headwind’. Natural dollar resistance may restore some equilibrium, but there is no evidence of that just yet.

Gold is finding it difficult to hold onto its tentative gains after plummeting last week. The dollar has been a factor for the commodities demise and so too has India. That country alone is the largest consumer of gold and with short term rates being hiked the market now sees short-term paper competing with gold for investment. Indian gold demand fell -19% last year as the ‘great recession’ hit global markets. Fundamentally it is expected that the commodity will find some traction as investors seek an alternative to an ‘on going weakening’ of the EUR and low interest rates. Analysts believe that with this ‘low rate environment combined with continued gold ETF interest and reduced Cbank sales’ should provide ‘strong’ support for gold over the next 18-months. Year-to-date, support remains at $1,090, but looks vulnerable. The dollar’s direction remains the strongest indicator to wanting the metal or not ($1,096).

The Nikkei closed at 10,815 up +41. The DAX index in Europe was at 6,034 up +17; the FTSE (UK) currently is 5,680 up +7. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.69%) and is little changed in the O/N session. Supply remains the main issue this week, as the US government auctions off $118b’s worth of new product. Ten-year prices managed to fall yesterday as sales of existing US homes dropped last month, softer than economists forecasted. Yesterday’s 2-year auction ($44b) was again well received, but the US government had to pay up to ‘find a home’. The auction was three times oversubscribed of 3.00, below the 3.33 in Feb. and also under the 3.13 four auction average. Direct bids were at 14% while indirect was 35%. The longer term trade is for a flatter curve (+272bp) and higher short term rates (0.25%), however, once the auctions are over this week, the market will again start to focus on the end of MBS buying by the Fed and the next set of auctions (long-end). The remainder of this week’s refunding requirements is expected to put further pressure on the curve (today-5’s $42b and tomorrow-7’s $32b).

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