How Hawkish is Trichet?

It’s all about the language, Trichet’s communique, not this morning’s ‘expected’ hike. The market has already priced in the ECB hiking its repo rate +25bp to +1.25%. Investors need guidance and should be focusing on the press conference to decipher policy makers intentions from the language that’s there or omitted. ECB mentioning ‘monitor closely’ or ‘monitor very closely’ upside risks to inflation is strongly associated with further near-term tightening. It’s time for Trichet to show his hand, Bernanke are you watching?

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in an ‘orderly’ session ahead of rate announcements.

The BoE is unanimously expected to keep rates on hold at +0.50% this morning and with no changes to their asset purchase plan. Markets will have to wait for the release of the minutes in two-weeks to see the possible changes within the already ‘divided’ MPC.

The USD is higher against the EUR -0.42%, GBP +0.00% and lower against the CHF +0.11% and JPY +0.30%. The commodity currencies are stronger this morning, CAD +0.15% and AUD +0.40%.

According to the technical analysts, the loonie is in ‘heavy oversold territory’, pushed there yesterday by a much better than expected Ivey PMI (73.2 versus 69.3) and a general weaker dollar sentiment. The CAD continues to gather support from commodities and the overall general recent positive opinion. The currency is set for slow methodical gain, nothing out of the ordinary.

After printing three year highs and appreciating +1.8% last week outright, it’s only natural that some profit would want to be taken. The ‘hawkish’ tone coming from Governor Carney about how the elevation in commodity prices generally leads to higher interest rates has given the loonie this bid tone, with traders happily selling historical funding currencies against CAD.

With ‘carry’ historically the go to trade this month, has investors looking to buy the currency on dollar rallies. The Federal political uncertainty is having a limited affect on the currency strength. The loonie will be supported in the long term by its fundamentals, a sound financial system and a strong job environment (0.9595).

Down-under is trying to lead the G10 rally, showing no lasting ill-effects from the decision by the PBoC to hike policy rates +25bp. Last night, the Aussie employment print beat expectations, rising +37.8k last month, more than the +24.0k the market expected, and the February fall in employment was revised from-10k to only -8.6k. This has pushed the unemployment rate down from +5.0% to +4.9% or what Governor Stevens may refer to as ‘full employment’. Recent job ads data earlier this week suggest that employment will continue to rise in the next several-months. This has pushed the currency just under 1.05.

The currency has printed a 30-month high versus JPY on the back of higher yields enticing investors wanting to own some of that premium. The market is back ‘in yield-chasing mode’. Growth and higher yielding currency’s will benefit. With Japan’s loose monetary policy, the yen is expected to continue to weaken further with Japan lagging any significant recovery.

Earlier this week Governor Stevens left interest rates on hold (4.75%) for a fourth meeting and indicated that the currency’s recent strength was helping to control prices, damping the need for further rate increases. Their levels of yields are still the highest in the G10 and continue to attract regional investor’s en masse. The expected mix of trade surpluses and rising capital inflows will provide support for the currency on pullbacks (1.0482).

Crude is higher in the O/N session ($109.10 +27c). Oil prices are being greatly influenced by Cbanks rather than OPEC. Crude is straddling its 30-month high for a second day as the EUR rallies against the dollar ahead or the ECB rate announcement this morning. Pull backs in the commodity are supported by contagion fears in the Middle-East and on the back of Libyan forces renewed aggression raising concerns about oil supplies for the near-term.

Last weeks EIA report showed crude stocks climbing +2m barrels. The market expected an increase of only +1.3m. On the flip side, gas supplies decreased-400k barrels, while distillates supplies (heating oil and diesel) increased +200k barrels. Fundamentally, the bearish report has only had a negative temporary affect on prices.

The recent MENA events will make it unlikely that investors will see a ‘swift normalization’ of crude-oil production in the region. On any pull backs, contagion fears continue to dominate the event risk category as the commodity marches towards stronger resistance above $110.

Gold has managed to print a new record high as rising inflation concerns boosted demand for an investment haven. China has tightened its monetary policy on inflation fears and later this morning the market expects Trichet will follow suit and begin his normalization rate policy. The dollar slumping against the EUR has also helped. The currency tends to trade inversely with the price of the commodity. The metal has jumped +29% in the past year.

Geopolitical reasons provide support on pullbacks for this ‘lemming’ trade, justifying consumers wanting to own some of the asset in their ‘own’ portfolios. Despite last weeks softening of prices, the commodity has preserved its tenth quarterly gain, its longest winning streak in over 35-years, as low interest rates and event risk provide support. It’s difficult to find a reason not to own some of the commodity.

The metals bull-run is far from over with investors continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets, especially metal being used as a store of value. However, rising interest rates increase the opportunity cost of holding non-interest-bearing bullion ($1,460 up+$1.50).

The Nikkei closed at 9,590 up+7. The DAX index in Europe was at 7,214 down-1; the FTSE (UK) currently is 6,042 up+2. The early call for the open of key US indices is higher. The US 10-year backed up 8bp yesterday (3.55%) and is little changed in the O/N session.

The US curve shifted higher for a second consecutive day on speculation the Fed will maintain its stimulus measures. This has sent inflation expectations to three-year highs. It seems that some of the recent hawkish rhetoric is finally having an impact on rates. Futures dealers show a +40% chance that US policy makers will increase its target rate for overnight lending at the December meeting, compared with a +33% chance a few weeks ago.

Investors will continue to focus on the ‘divergent views’ from Fed members over when they will begin tightening its ‘easy’ money policy. The market remains cautiously short on the back of this before we get to digest Trichet comments later this morning.

This week is an important week for global yield curves, especially for the ECB and the reason investors are reluctant to take on big bets even with event and geopolitical risk in abundance.

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