Merkel’s call for ‘orderly default’ supports EUR shorts

It’s a new blow to the EUR confidence when Merkel calls for an ‘orderly’ default possibility in the Euro-zone and that ‘orderly’ insolvencies of states must be studied. There is nothing orderly about these markets which are moving erratically on ‘fumes alone’. The currency has garnered strength on the fear that the G7 is concerned about the speed of its decline this month. Capital Markets have been preparing for some verbal intervention to support the EUR ‘if the rout continues’. What about multilateral currency intervention? We have not seen that in a decade. With the heavily weighted one-sided bet, surely policy makers would get value for their money on actually intervention? Perhaps they are afraid that the ‘lift’ would only be temporary. In the short run its good news in the fact that Merkel has not been backed by major EU members on the short selling ban. However, the EUR’s highs are getting lower providing support for those shorts.

The US$ is mixed in the O/N trading session. Currently it is higher against 10 of the 16 most actively traded currencies in ‘whippy’ trading range.

Yesterday we witnessed that the disinflationary pressures in the US remain immense. CPI came in weaker than expected last month (-0.1% vs. +0.1%) as ‘substantial excess supply continues to limit pricing power’. Despite printing strong quarterly growth gains, analysts expect the pace of growth to diminish as fiscal support eases. Throw the ongoing European debt crisis into the equation and add a US unemployment rate close to 10% and we can expect the Fed to remain committed to leaving rates at near-zero for an ‘extended’ period of time. We could even be talking about late next year. Ex-energy and we would have had a +0.1% for the month because energy prices declined -1.4%. Interestingly, core-CPI remained unchanged (+0.0%), evidence perhaps that deflation worries are moot at the moment. Digging deeper, the housing sub-sector costs eased again along with apparel and transportation prices. It’s worth noting that gas prices led the decline in transportation costs, however, car prices also fell during the month. Now that oil is down 20% in the last three week, the expected decline in retail gas prices is expected to further pressurize CPI going forward.

Adding fuel to the negative equity blowout yesterday was a report showing that a record number of US mortgages were in foreclosure in the 1st Q (+10.06% vs. +9.47%) as job losses are pressurizing homebuyers to fall in arrears on their monthly payments. The inventory of homes in foreclosure jumped to +4.63% vs. + 4.58% in the 4th Q.

The USD$ is lower against the EUR +0.27%, CHF +0.20% and JPY +0.14% and higher against GBP -0.16%. The commodity currencies are weaker this morning, CAD -0.75% and AUD -1.29%. Yesterday, Canadian wholesale sales rebounded strongly in Mar., more than doubling expectations (+1.4% vs. -1.2%). Six of the seven sub-sectors posted gains, accounting for about +85% of the total. Price-adjusted sales rose at an even faster pace, as wholesalers paid less for imported goods (stronger loonie), which should add some support to real-GDP later this month. However, strong data was not able to support the currency as questionable global growth and weaker commodity prices again pressurized the loonie and pushed it towards a two-week low. The flight to quality, equity losses and the fear of a multilateral currency intervention has investors selling CAD on the cross, temporarily at least. It’s worth noting that the aversion trading strategies that historically require purchasing of the USD in abundance and selling of the loonie are being ignored somewhat. The dollar has been in demand vs. most of its other major trading partners and not against its largest. For the time being the market is happy to take whatever profit they can and see how the European rhetoric shapes up. OIS’s are currently prices a 75% chance that the BOC will hike in June. If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency. In the O/N session, the loonie came under renewed pressure from rumors circulating that the Canadian Government is ‘mulling a similar tax to the mining super tax in Australia’.

The AUD fell to its weakest point in more than eight months vs. the greenback in the O/N session on concerns that Europe’s debt crisis will ‘derail the global economy and sap demand for higher-yielding assets’. It’s not surprising with the doubt that the markets are experiencing in the EU/IMF accord that growth currencies have retreated from their initial euphoric high recorded earlier this month. Last week the AUD failed in its attempt to garner some support after a stronger job’s report (+33.7k vs. +22k). Since then the currency has fallen for a six-consecutive day against the JPY on the deficit-cutting measures. Weaker regional bourses are been driven by the possibility of a slowdown in China. It’s undermining confidence that a ‘revival in growth is sustainable”. The AUD is encroaching on longer term support levels after this week’s sell off thus far. Analysts expect some initial support at these levels (0.8330).

Crude is weaker in the O/N session ($69.80 down -7c). Crude prices ‘hummed and hawed’ unable to sustain gains despite the weekly EIA report recording a ‘smaller print’. Prices have tried to rebound on oversold indicators and as the EUR advanced against the dollar after plunging to a four-year low. The weekly inventory report showed that crude stocks gained +200k barrels vs. a market expectation of +1m. On the other hand, gas stockpiles fell -300k barrels. Interestingly, again inventories at Cushing (the delivery point for benchmark WTI) rose +917k barrels to a new record of nearly +38m. Not helping the crude’s price was refinery runs dropping to 87.9% of capacity, from 88.4% a week earlier. With global equities under pressure and Germany banning of various bearish investments only fueled concerns that the region’s debt crisis will worsen, eventually effecting global demand more deeply. The US economy and the dollars strength and not oil fundamentals have driven the market to date. The IEA has again cut its estimate of world oil demand this year by -220k to +86.4m barrels a day. The medium term technical are being tested and analysts now expect the commodity to remain on target to at least dip to $65.

With the EUR appreciating vs. the dollar, equity losses mounting and inflationary fears ‘none’ existent had many gold bulls heading for the exits yesterday. Investors believing that we would see the EU-Zone acting to support their currency, which has depreciated -13.5%, year-to-date, had speculators dumping their demand for a ‘safer-heaven’ commodity, which has appreciated +9.5%.Up until now the market has been weary of the EU/IMF loan accord to bail out indebted Euro-nations, believing that the monies promised may not be enough to contain the sovereign debt crisis. Traders have been speculating that the EU/IMF agreement could ‘cement easier monetary policy’ and promote inflation. Investors have been using the commodity as a ‘currency of last resort’ in supplementing their EUR denominated assets. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on deeper pull backs ($1,190).

The Nikkei closed at 10,030 down -156. The DAX index in Europe was at 6,006 up +18; the FTSE (UK) currently is 5,200 up +43. The early call for the open of key US indices is lower. The US 10-year eased 1bp yesterday (3.33%) and is little changed in the O/N session. Treasury yields managed to print yearly lows on the back of plummeting global bourses and on fear that Europe will further regulate financial markets. These are two good enough reasons to dampen investor appetite for higher-yielding assets. All week the treasury bears have been revising year-end yield targets. Their excuse, the European sovereign debt crisis ‘did not appropriately discount the sovereign risk conditions’. Treasuries prices will remain bid as demand for the ‘safest assets’ intensifies. The benign US CPI numbers yesterday solidifies the Fed’s stance on keeping rates on hold for an ‘extended period of time’.

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