EU/IMF fail to support the EUR

They can pat themselves on the back and reassure their domestic voters that what they held out for will benefit ‘one and all’. Merkel said she was right to demand IMF involvement in the Greek bailout over the objections of her European allies. Of course she would say that, she too is under an election gun. It’s all well and easy to ‘persuade’ a country to conform to these European austerity demands, but it’s the general domestic populous that will have to abide by them and not just a ‘verbal appeasing’ government. The $146b rescue plan for Greece thus far has failed to calm concerns about sovereign debt in Europe. There are various reasons why the EUR is dramatically trading lower this morning. Consensus believes that the main reason has been the ECB deciding to accept Greek bonds as collateral ‘as part of the overall aid to Greece’. The ECB has in effect accepted and lowered their ‘quality standards’. It begs the question will they be doing this for other struggling countries? The deal is not yet ratified by each national parliament, with Tokyo and London out today, reaction is delayed. Where will investors shift their focus to next? Portugal, Spain?

The US$ is stronger in the O/N trading session. Currently it is higher against 14 of the 16 most actively traded currencies in a ‘whippy’ trading range.

Despite the market waiting for Greek ‘tidbits’ on Friday US data brought us a mixed bag of results. The Chicago PMI managed to print another upside surprise for the last month, 63.8 vs. 60, the highest reading in four and half-years. Analysts expect the cumulative regional readings to show that orders and production indexes should improve even further and that the factory employment index to edge higher over the medium term. A tad of a surprise was the University of Michigan consumer sentiment. The headline index for the month fell by just -1.4 points to 72.2, vs. a 4-point decline to 69.5 in the ‘preliminary’ estimate. Digging deeper, the inflation expectations print remained stable for the month. The future expectation index was unchanged at the preliminary April level of 2.9%, while the 5- to-10 year rate remained flat at 2.7%. The Fed can breathe easier, as the current levels fall within the policy makers ‘expectations’. Not as reassuring was the advance GDP number which was weaker than expected. The headline growth was below most analyst’s expectations (+3.2% vs. +3.5%) and the sub-category prints were less encouraging. Inventories contributed to half of the growth (+1.6%), while domestic demand advanced only modestly (+2.2% in the Q vs. +1.4% in the 4th Q). Analysts’ explained the aggregate levels away by being dragged down by the fiscal tightening at the state and local government level. If true, we should expect these factors to drag on over a few quarters. Finally, the PCE price data was very much in line with expectations, the core index decelerated to a new low of 0.6%. This is further evidence that disinflation pressures remain a dominant theme in the data and for the Fed’s debate of keeping rates low for an ‘extended’ period of time.

The USD$ is higher against the EUR -0.81%, GBP -0.52%, CHF -0.75% and JPY -0.27%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.59%. It was only a matter of time before we get to see loonie give up some of this year’s strong gains. It managed to record its largest weekly drop this year as global equities struggled overshadowing the sixth consecutive gain in Canada’s GDP report (+0.3%). With the EU/IMF accord tentatively in place some off the insurance premium was priced out on Friday. Canadian fundamentals, similar to Australia have been hitting it out of the park when compared to other economies. Unlike the RBA, the BOC seems to be behind the blackball when it comes to their lending rate adjustments. Governor Carney reiterated to a House of Commons committee last week that it’s ‘appropriate to begin to lessen the degree of monetary stimuli’. Now that some of the European uncertainty has lessened, one should expect better buying of the loonie on dollar rallies ahead of this week’s North American employment reports.

It’s a know fact that the AUD has climbed +27% vs. the USD over the past 12-month and is the best performer amongst the 16 most-traded global currencies. It again advanced last night on news that a Greek bailout was officially tabled. The Currency specifically advanced vs. the JPY as the bailout package for Greece reduced demand for JPY as a safer haven. The currency also remained better bid on expectations that the RBA will again hike rates tomorrow (4.25%) for the sixth time in seven meetings. The risk to the rate decision could be the RBA is also more hawkish than anticipated. It was only natural that O/N gains were tempered by concerns about the impact of plans to raise taxes on mining companies operating in Australia and China’s decision to increase bank reserve ratios. We will have to wait and see how North America wishes to digest this information. Similar to the CAD, any improvement in risk appetite will have investors coveting higher yielding growth currencies. Expect better buying on pull backs.

Crude is lower in the O/N session ($86.07 down -7c). Oil never had a chance to ease up on Friday, printing a new three-week high as the dollar buckled and a report showed that the US economy grew in the 1st Q. Now that the Fed has stated that it will keep rates on hold for an extended period of time, coupled with last weeks EIA report showing that refineries cap-u is at the highest level in two years has once again given the black stuff a ‘leg up’. With the Fed emphasizing the strength of the economic recovery in their minutes is having a positive impact on the commodity. Perhaps North American will want to take some profit off the table this morning. It’s worth noting, that in total, refiners have dragged their utilization rate higher by +6.4% last month alone and all the while not knowing how much fuel demand will rise in the next few months. Analysts remain concerned that the European contagion issues will dominate risk aversion. It’s worth noting that crude oil volatility has fallen to its lowest level in almost 3-years on the back of rising stockpiles and OPEC’s ‘investment in production capacity easing concerns of shortages’. The lack of volatility has ‘temporarily’ dampened any selling enthusiasm. Expect better selling to remain on rallies.

Gold ended up being an easy play on Friday, advancing, surpassing and printing New Year highs on fears that sovereign-debt risk may erode the value of currencies. This boosted the demand for the yellow metal as an alternative asset. For most of last week, investors had sought surety in owning dollars and gold after S&P’s lowered the credit ratings for Spain, Portugal, and Greece. In a ‘bigger picture’, frightened capital is seeking a safer heaven as the European contagion fears continue. It is very much the safe-haven appeal of gold that is boosting prices. Various technical analysts believe that $1,300 is a possible one-year target with consumer support. Downgrades and fear of defaults will continue to have investors seeking an alternative to an ‘on going weakening’ of the EUR ($1,178).

The Nikkei closed at 11,057 up +132 (closed). The DAX index in Europe was at 6,111 down -23; the FTSE (UK) currently is 5,555 down -64 (closed). The early call for the open of key US indices is higher. The US 10-year eased 7bp on Friday (3.65%) and is little changed in the O/N session. Treasury prices ended on a winning month, the first time since Jan. A combination of factors had the market scrambling to own some insurance for the month end. Fear that the Greek debacle cannot be contained despite some assurance from both the EU and IMF had the curve better bid, and all this despite the encouraging US data. Last week’s $129b issues were fairly priced and well received, but with a lack of product on offer for awhile, investors have kept the FI curve better bid on price pull back’s. After the weekend’s assurance from the European governments we should expect some profit taking to take place as we head into Friday’s employment numbers.

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