EUR’s dog day afternoon

Say it ain’t so….have we hit the ‘dog days’ of summer already just when the World Cup is about to finish? Where are traders going to get their fix? With a lack of FX trading conviction, unlike some of the other asset classes, has the currency market committed to a relatively tight boring trading range. The BOE and ECB rate decisions and statements had little impact on the market. Even a Greek general strike creates an attitude of ‘having been there done that’. One gets the sense that the market is content in waiting for the Stress Test results announcement later this month. For some, they believe that the EUR correction has run its course and are quietly accumulating new short EUR position with s/l’s about the psychological 1.29 level.

The US$ is mixed in the O/N trading session. Currently it is higher against 9 of the 16 most actively traded currencies in a ‘subdued’ trading range.

Yesterday’s US data again confirms that weekly jobless claims are stuck in a tight range (+439k vs. +490k). The headline print fell more that what the market was expecting, for a combined decline of -245k, initial +454k (+460k) and continuing +4.14m (+4.6m). The last time that we witnessed a decline of this magnitude was 3-months ago. Digging deeper, the 4-week moving average for initial currently resides at +466k (-1.2k w/w), while continuing claims is now piggy-backing its lowest level in two years. More of a surprise was the number of individuals who continued to receive jobless benefits. The final tally plummeted -224t to +4.413k, outpacing a market consensus of +4.6m. It’s worth noting that historically, claims have tended to increase this time of year, due to summer
factory shutdowns. However, analysts note that they expect a number of manufacturers to remain open this period.

The USD$ is lower against the EUR +0.07% and GBP +0.12% and higher against CHF -0.22% and JPY -0.08%. The commodity currencies are mixed this morning, CAD +0.08% and AUD -0.14%. It was not rocket science to understand the reasoning for the loonie to print a new monthly intraday high yesterday. With crude, at one point, threatening to push much higher on risk-on positive sentiment buoyed by the IMF’s global growth forecasts, had speculators wagering bets that the CAD would outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this week, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. Big picture, investors remain concerned that the global recovery is not being as robust as expected and have been wary of driving the loonie much higher ahead of today’s unemployment report (+18k). If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital. Bring on the employment numbers!

The AUD is about to complete its best week in 9-months on signs that the global economic recovery is indeed still alive, boosting demand for higher yielding, commodity backed, growth currencies. We have seen already seen this week that there is nothing better to drag a currency higher that strong employment numbers these days. The Australian economy added three times as many jobs than had been forecasted (+45.9k vs. +15k) earlier this week. With global stocks and commodities also rising, boosted the demand for currencies tied to growth. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. The currency received its first shot in the arm this week when Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. This has disappointed the ‘dove’s positions’. A strengthening job market may escalate pressure on inflation and the need to hike domestic rates again sooner rather than later. The market continues to speculate that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. With the crisis in Europe not having a material impact on the Australian economy has ‘bulls’ better buyers on pull backs. Be wary of commodity prices, market euphoria can only love the currency so long (0.8741).

Crude is higher in the O/N session ($75.70 +40c). Crude, boosted by equities, managed to pare some of its gains after the weekly EIA report yesterday. The headline print revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. The EIA reported an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. Yesterday morning the EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and investor confidence, with ample supply and global growth worries, speculators would prefer to sell on rallies.

The ‘yellow metal’ has not strayed too far from its close. After falling to a 6-week intraday low earlier this week, the commodity has found again its sea legs, as investors weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). A stronger EUR this week had reduced demand for the metal as a haven. Technically, the bullish sentiment is on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175 is broken. Year-to-date, the commodity has gained +10% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,197 +$1.40)!

The Nikkei closed at 9,585 up +50. The DAX index in Europe was at 6,057 up +22; the FTSE (UK) currently is 5,109 up +4. The early call for the open of key US indices is lower. The US 10-year backed up 6bp yesterday (3.03%) and is little changed in the O/N session. Debt prices drifted lower after equities rallied and after a better than expected weekly US claims report yesterday. Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2%, and the announcement for next weeks US debt auctions (3’s $34b, 10’s $21b and Bonds $12b) warranted dealers to cheapen up the curve and push 10-year yields through the +3% level again. With the current market sentiment, dealers will want to sell product on up-ticks.

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