Trichet and Political risk encourages dumping EUR

Trichet is fast becoming the mouthpiece that Capital Markets do not listen to. In his ‘read my lips’ comments yesterday, again he reiterated that the ECB has not adopted quantitative easing and that the ECB is independent. The markets ‘consistent’ reaction tells you that they are not convinced. Trichet and Co. have been forced into various u-turns on Greece surrounding the collateral eligibility and bond repurchases in the midst of the rescue packages. Coordinated comments from various policy makers touting the EUR as a credible currency is falling on deaf ears. Even Juncker does not see any real ‘need to take immediate action’ with ‘multilateral’ currency intervention and believes that the markets are behaving in an ‘irrational’ way. The SNB is on its own. The markets may be behaving irrationally when it comes to ‘liquidity and these random price movements’, but rational when it comes to the gravity of the European problems. Expect the ongoing global asset allocation shift away from the Euro-Zone to continue to trump the fundamental factors, such as growth and the outlook for their relative monetary policy.

The US$ is stronger in the O/N trading session. Currently it is higher against 12 of the 16 most actively traded currencies in another ‘volatile’ trading range.

Not a good day all around yesterday. US jobless claims managed to disappoint again (+471k vs. +440k). The market had been hoping that the weekly report would by now be gravitating towards that psychological +400k print which basically supports a consistent growing monthly NFP print. The perseverance of a weaker claims number questions the sustainability of the US recovery. The unexpected jump in last week’s claims is a step back toward the ‘high end of the tracking zone for this year’. Digging deeper, the continuing claims fell (+4.625m vs. +4.665m), but not by as much as expected. It’s worth noting that the previous week’s continuing claims were revised higher to +4.665m from +4.627m. Overall, the emergency benefits claims declined, putting the current level now on par with those posted six-months ago and at the peak at the end of Mar. The entire drop, however, came from the Emergency Unemployment Compensation (EUC) program (+5.101m vs. +5.196m), while Extended Benefits (EB) rose for a second consecutive week (+240k vs. +218m).

Manufacturing activity continued to accelerate as the Philly Fed improved again this month, managing to print its highest level in six-months (21.4 vs. 21). Disappointingly, we witnessed future expectations dip slightly, as production recovery starts to slow. Digging deeper, shipments rebounded strongly back into double-digit territory (10.8) after falling last month (5.6), but, negating this was new-orders falling a similar percentage (6.1 vs. 13.9). Perhaps it’s evidence that the weakness may be attributed to the negative fallout from the European debt crisis. Inventories contracted along with unfilled orders while the number of employees and the average workweek eased yet again. Not unlike this week’s earlier Fed release, the prices received component edged up while prices paid declined slightly, suggesting a slight widening in margins. The six month expectations saw new orders move up while shipments pulled back. Interestingly employment also surged ahead.

Finally, yesterday we also witnessed US leading indicators retreating for the first time in over a year (-0.1% vs. +1.3%). The negative three to six month outlook may be a sign that US economic expansion is expected to cool in the latter half of this year.

The USD$ is higher against the EUR -0.09%, GBP -0.04%, CHF -0.01% and JPY -0.24%. The commodity currencies are stronger this morning, CAD +0.04% and AUD +0.31%. Risk aversion trading strategies happened to push the loonie to its lowest level in two-week’s yesterday. Couple this with early morning rumors that the Canadian government was mulling over the idea of a ‘super-tax’ for mining (similar to Australia) pushed the weaker Canadian longs towards the exits. Questionable global growth, weaker jobs data out of the US, and soft commodity prices again have the ‘growth currency’ in a stranglehold for now. The flight to quality, equity losses and the fear of a multilateral currency intervention has the CAD underperforming on the crosses. OIS’s are currently prices a 50% chance that the BOC will hike in June (down 25bp from the previous day). If this uncertain environment continues then the market will want to unwind some of the interest premium already priced into the currency.

The AUD managed to find it footing and retreat from its 10-month low in the O/N session on speculation that ‘policy makers may seek to contain this month’s plunge in currencies’, in the form of multilateral intervention. This short squeeze has turned all currency markets upside down over the past two trading sessions. The AUD was pushed to its lows 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 highs 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). Weaker regional bourses are been driven by the possibility of a slowdown in China and its undermining confidence that a ‘revival in growth is sustainable”. The AUD sits close to its longer term support levels after this week’s sell (0.8305).

Crude is weaker in the O/N session ($70.10 down -70c). Crude prices managed to print a seven month low yesterday mostly on the back of global bourses plummeting and the dollar maintaining its attractiveness. Oil is being dominated by currency speculation and not on ‘their’ own fundamentals. Prices, for the most of it, have tried to rebound on oversold indicators. The issue of oversupply is expected to be addressed by OPEC if we continue to see price slippage. However, oversold technical support remains at $65 a barrel. This week’s EIA report managed to record a ‘smaller positive print’, showing 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 is refinery runs dropping to 87.9% of capacity, from 88.4% a week earlier. With global equities under pressure is only fueling concerns that the region’s debt crisis will worsen, and by default it may affect global demand. 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 speculators heading for the exits for most of this week. Speculators believing that we would see the EU-Zone acting to support their currency, which has depreciated -13.5%, year-to-date, had traders dumping their demand for a ‘safer-heaven’ commodity. To date, 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 ($1,175).

The Nikkei closed at 9,784 down -246. The DAX index in Europe was at 5,812 down -56; the FTSE (UK) currently is 5,040 down -33. The early call for the open of key US indices is higher. The US 10-year eased 10bp yesterday (3.23%) 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 inflation numbers earlier this week solidifies the Fed’s stance on keeping rates on hold for an ‘extended period of time’. European political risk has the US yield curve wanting to test much lower.

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