Is the EUR’s demise out of gas?

Is this the calm before another storm where the currency markets have got too far ahead of themselves? The way the EUR has traded in the past 24-hours suggests that the market is caught in no-man’s land. Investors certainly have quizzed the adequacy of the Euro-zones bail out plan in their currency’s initial move. With the market somewhat doubling-down the momentum seems to be lost. Reading all the headlines and analysts thoughts very few have given the EU/IMF accord a thumb’s up, in fact most are hammering in the final nail in the coffin. It’s agreed that the EUR probably requires a ‘deep depreciation to restore competitiveness in their floundering economies’ and perhaps we may get to see a two tiered EUR or fewer countries adopting it, but it’s not happening tomorrow and with the currency’s demise running out of gas may provide the impetus to run to an exit short-term.

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 ‘whippy’ trading range.

Forex heatmap

Yesterday we got to witness US wholesale inventories rise for a third consecutive month (+0.4% vs. +0.5%), leading to a quarter gain of +0.5%. Coupled with a continuous sales growth, the US recovery is very much underway. This is in stark contrast to what we became accustomed to during the recession. Digging deeper, durable goods accounted for all of the strength in inventories with a gain of +0.8%, m/m, as non-durable goods inventories dropped -0.2%. Breaking the durables component down, cars (+0.9%) and computers (+2.6%) witnessed the largest gains while machinery inventories fell again. The sales growth advanced +2.4%, m/m, (the fastest increase in 6-months) as both durable (+2.0%) and non-durable (+2.8%) goods sales rose further during the month. It’s not surprising to see that petroleum accounted for a large portion of the gains (+6.6%). Even healthier is that ex-petroleum sales were still up +1.8%. Now that sales are consistently outpacing inventories, the inventory/sales ratio fell again in Mar. to 1.13 (the lowest level in three decades) and proof that US demand is rebounding. This should put further pressure on production.

The USD$ is higher against the EUR -0.13%, CHF -0.10% and JPY -0.24% and lower against GBP +0.19%. The commodity currencies are mixed this morning, CAD +0.32% and AUD -0.16%. On a cross related basis the CAD continues to find strong buyers. In the O/N session it has managed to print an 8-year high vs. the EUR as investors seek surety in a currency that has strong fundamentals. Risk aversion trading strategies that historically require purchasing of the USD and selling of the loonie are simply being ignored. The dollar has been in demand vs. most of its other major trading partners and not against its largest. This week, the CAD has managed to retreat from a three-month low, after the EU/IMF accord announcement, as a record increase in ‘their’ employment last month (+108k vs. +24k) has dealers pricing in a rate hike by the BOC next month. Technical analysts have noted that the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes, but, the countries stronger fundamentals coupled with a ‘rapid’ gold market is bringing loonie buyers on dollar rallies back into the market. Loosening risk aversion will only promote the currency even more.

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 its second consecutive day 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 low 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 (0.8952).

Crude is little changed in the O/N session ($76.57 up +20c). Oil found it difficult yesterday to find traction despite the heavily discounted prices of late and Europe’s initial pledge to overcome the debt crisis. Last weekends financial terms provided a ‘strong’ speculative buying opportunity that lasted all of 24-hours where crude managed to rally from a 3-month low. With the EUR reversing its euphoric rise and the market anticipating another weekly inventory increase has the bulls on the back foot. One would have expected that US product demand would have maintained the commodity’s upward trend. However, risk aversion trading remains ‘trumps’ at the moment. The market is now defending the $75 support levels, where earlier this week it had expected the commodity to revisit the $80 handle. Over the last 5-trading sessions the ‘black gold’ has managed to shave -12% of its value. 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. Again this morning we may be dealt another weekly inventory rise.

Gold continues to outpace other asset classes and constantly recording new record highs on concerns that the EU/IMF loan accord to bail out indebted nations in Europe may not be enough to contain the sovereign debt crisis. Investors are speculating that the aid package could ‘cement easier monetary policy’ and promote inflation. It does not help that China managed to record its highest rate of inflation gain in 18-months this week (April’s CPI was up +2.8%, y/y). With the chances of monetary tightening being postponed in Europe is positive for the ‘yellow metal’ as interest rates are an ‘opportunity costs for non-yielding assets’. Year-to-date, the yellow metal has appreciated +10% on European contagion fears, while the EUR has depreciated -11% fueling demand for the commodity as an alternative investment. The technical bulls 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 ($1,234).

The Nikkei closed at 10,394 down -17. The DAX index in Europe was at 6,112 up +74; the FTSE (UK) currently is 5,341 up +7. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.53%) and is little changed in the O/N session. The treasury market continues to prepare itself to take down this week’s $78b supply of new product with dealers cheapening up the curve. Yesterday’s $38b 3-year note was well received and yielded 1.414%. The bid-to-cover ratio was 3.27, compared to 3.1 last month and 3.13 in Mar. The average is 3.01 in the past four-auctions. The indirect bid (a proxy for foreign demand) was 51% compared with 52.2% in Apr. The indirect bid (non-primary dealers etc) was 17% vs. 10.7%, m/m. With the market needing to take down $24b 10-year product today and $16b long-bonds tomorrow and risk aversion easing should provide further pressure to the curve.

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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