A Trillion gets the EUR Nothing

Firstly, let’s give a round of applause for the EU members finally getting it together and collectively tabling something. Their objective is to bring an end to speculators actions that have been undermining the existence of their own currency and hence their existence. What is the net result of the EU/IMF accord? Despite bringing some calm to the market, for 24-hours, investors have been trying to digest the EU member’s intentions. According to Roubini, the plan ‘requires fiscal austerity and higher taxes’, which could ‘dampen growth and possibly extend economic hardship’. In other words, the accord may only be a ‘whitewash solution’. Economics 101 tells us that raising taxes and cutting spending in the Euro-zone, an already questionable economic base, could promote further recession and further deflationary pressures, otherwise know as ‘their double-dip’.

The US$ is stronger in the O/N trading session. Currently it is higher against 11 of the 16 most actively traded currencies in a ‘volatile’ trading range.

It seems that the market is finding it difficult to buy into the EU/IMF accord as witnessed by the currency’s trading range to date. Despite throwing everything but the kitchen sink at the problem, the EUR has failed miserably to try and stay above that psychological 1.3000 level. Even with the ECB assurance to ‘sterilize’ the sovereign bond purchases, their actions scream of quantitative easing and with QE promotes a weaker currency. When the ECB does take on these ‘bonds’, they will have personally absorbed the credit risk and combined with the lower collateral requirements the market interprets this as being negative for the currency. No matter what way you ‘slice and dice it’, investors believe that the ECB has lost some of its independence and certainly its credibility. The domestic outcry within various countries is beginning to be noticed, specifically for Merkel. The German opposition wants to know what the true cost to them will be and will they have to again ‘pony up cash for the countries that are short this month’? Internal protests will persuade a politician to change their allegiance when political survival is on the table. It’s no wonder the world is short the EUR.

The USD$ is higher against the EUR -0.31%, GBP -0.20% and lower against the CHF +0.18% and JPY +0.55%. The commodity currencies are weaker this morning, CAD -0.04% and AUD -0.31%. Fear had been pressurizing growth currencies, just look at the loonies trading pattern last week. Since Friday, the CAD has managed to retreat from its three-month lows as a record increase in ‘their’ employment last month (+108k vs. +24k) has heightened speculation that the BOC will raise borrowing costs as early as next month. Macro views and not domestic micro fundamentals have been dictating the volatile swings in the currency markets. Technically of late the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes. Now that the market is getting support from a European emergency package contagion fears will remain somewhat intact. Fundamentally, North America is beginning to produce some stellar numbers and with any dollar rallies the market will want to add to their CAD longs.

It’s not surprising with the doubt that the markets are experiencing with the EU/IMF accord that growth currencies have retreated from their initial euphoric high. The AUD has fallen for the first time in three day’s in the O/N session as investors shy away from higher yielding assets. Currency markets, unlike the other asset classes, are taking less than an optimistic view to the overall package. Investors are questioning the longer term stability of the region and believe there are cracks in the EU’s ‘winning formulae’. Already this week we have witnessed the AUD appreciating the most in over a year vs. the greenback as investors again sought yield. Last week it fell to a three-month after the retail sales print increased by less than half as much as the market expected (+0.3% vs. +0.8%). Again the currency is trading towards its lows on concerns that global growth may falter and on market speculation that the RBA will cool the pace of future interest-rate hikes. In the short term the markets wants to sell on rallies (0.8982).

Crude is lower in the O/N session ($75.80 down -100c). The heavily discounted prices in various commodities had provided a ‘strong’ speculative buying opportunity over the past 24-hours and oil was no-different. Crude managed to rally from a 3-month low on ‘the’ loan accord. At one point, the black stuff appreciated +4.5% intraday, its largest surge in 8-months. The global surge in equities remains a big supporter for the ‘black-stuff’. However, O/N market sentiment has managed to complete a u-turn in all asset classes. The market is now defending the $75 support levels, where as yesterday it had expected the commodity to revisit the $80 handle again soon. Up until Friday, this month alone, the ‘black gold’ managed to shave just under -11% of its value. Global growth concerns, on the back of credit downgrades in Europe, and a dollar in demand sped up the commodity’s downfall. Not helping the cause was last weeks EIA headline print gain of +2.76m barrels, w/w (the highest levels in 11-months). Recent prices have been supported on ‘expectations that demand will climb as economies rebound’, however, the market seems to be relying on fundamentals and the oversupply of the commodity. This aid package is not providing the $80 dollar leg up that the bulls had expected.

Gold managed to cut most of its losses and then some in the O/N session amid speculation that the EU/IMF aid package could ‘cement easier monetary policy’ and promote inflation. With the chances of monetary tightening being postponed is positive for the ‘yellow metal’ as interest rates are an ‘opportunity costs for non-yielding assets’. Initial reaction had the market selling the commodity down to $1,183+ from its five-month high on speculation that the agreed emergency fund will be enough to contain sovereign debt risks and help sustain growth in the region. This month, investors have preferred the yellow metal over paper money as an asset alternative. Various technical analysts believe that $1,300 is a possible one-year target. For now, the market seems to want to be better buyers on pull backs as physical demand from India begins to be priced in the market ($1,209).

The Nikkei closed at 10,411 down -119. The DAX index in Europe was at 5,937 down -81; the FTSE (UK) currently is 5,298 down -90. The early call for the open of key US indices is lower. The US 10-year eased 5bp yesterday (3.52%) and another 5bp (3.47%) in the O/N session. The initial reaction of treasury prices was to plummet after the announcement of Europe’s ‘unprecedented loan package’ on the weekend. The market has managed to pare some of the losses as global bourses retreated somewhat after the initial euphoria. Up until the announcement, the Euro-zone sovereign debt crisis had been holding government bonds aloft. With dollar libor holding close to 9-month highs, despite the EU/IMF accord, should provide further support for the FI asset class. This week the market gets to take down an unprecedented low $78b of new product from Treasury (3’s, 10’s and 30-years). Dealers should easily make room for the auctions starting with today’s 3-years.

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