EURO is looking for that exit

For most of this year, the Euro-zone peripheral debt problems have been a non-issue. Why? Capital markets have been relying on politicians to see the region right again. Even though the cost for some peripheral debtors has continued to rise, and the insurance premium for holding their debt become exorbitant, the EUR has remained strong, supported by the hawkish stance of the ECB.

However, that scenario is changing. Trichet surprised the market last week, proving less hawkish than expected. Euro-finance ministers have been scrambling to deny rumors that Greece was seeking ‘the’ exit. Juncker has conceded that Greece does need a ‘further adjustment program’ above the already Euro110b negotiated to kick in next year.

Your can just hear it, will all peripheries that require further assistance please form an orderly queue here, beside the exit sign!

The US$ is weaker in the O/N trading session. Currently, it is lower against 12 of the 16 most actively traded currencies in an ‘orderly’ session.

Forex heatmap

European finance ministers did meet to discuss the Greek adjustment program, but this was a search for ways to extend the program rather than force a restructuring. This news has reduced the risk of a sudden return to crisis in the Euro area and has led to a tentative relief rally this morning.

The USD is lower against the EUR +0.78%, GBP +0.01%, CHF +0.58% and JPY +0.01%. The commodity currencies are stronger this morning, CAD +0.22% and AUD +0.70%.

The loonie has snapped the broad selling of risk assets, after falling the most against the dollar on Friday in 10-months, when crude, the country’s largest export plummeted on concerns that the global recovery is stalling. Last week, the CAD retreated from a three-year high as commodities plunged and on concerns for Greece’s continued Euro membership happened to drive investors to seek sanctuary in the world’s goto safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). With corporate CAD buying interest not appearing until above 0.97, the loonie remains at the mercy of the death of bin Laden wiping away ‘the Arab spring premium’ and changing the focus of the energy demand picture. Investors wish to be better buyers of the currency on dollar rallies (0.9653).

The AUD has rallied a second consecutive day on the belief that Chinese data tomorrow will show that imports increased last month, a sign that tighter monetary policy is ‘not crimping the Asian nation’s growth’. China is Australia’s largest and most important trading partner. A banking group jobs report O/N showed that jobs advertised down-under increased +1% in April vs. March, when they gained +1.3%.

The currency has been able to rebound from last weeks lows after the RBA sounded ‘surprisingly’ hawkish in its Statement of Monetary Policy. The hawkish Statement came in well above market expectations of forecasts remaining unchanged. Governor Stevens is signaling that ‘current mildly restrictive monetary policy is not enough to contain inflation pressures in the pipeline’. Furthermore, the RBA is indicating that market pricing of one hike over the next year is not enough. Underlying inflation is now expected to be above its 2-3% target band by the end 2013.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on pullbacks for the time being (1.0756).

Crude is higher in the O/N session ($100.24 +$3.06c). Oil prices have plummeted recently, falling-15% last week, on the back of the death of bin Laden and a strengthening dollar breaking all sorts of support levels as mixed US data boosted concerns that economic growth and fuel demand will decline in the biggest crude-consuming country. Price movement has certainly been over extended and last nigh action was able to reclaim back some of ‘the’ lost ground after Euro minister clarified their intentions over Greece.

Not helping the black-stuff was last week’s inventory report, which were much more bearish than expected. The weekly EIA data showed crude stocks rising +3.4m greater than the +2m barrel build expected by the street, signaling less demand from refiners. On the flip side, gas stockpiles fell-1m barrels, while inventories of distillates (heating oil and diesel), fell -1.4m. Analysts had expected that gas stocks would rise +100k barrels. They were looking for distillate stocks to climb +400k. Gas consumption dropped -2.2% to +8.94m barrels a day last week.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities, and a rising dollar that forced this drastic easing of oil prices over the past week. The market had been overbought and last week’s purging is largely a momentum thing. Expect the energy market to find more support around these levels.

Gold has rebounded since Friday morning, halting a three-day slide, despite silver plummeting-27% on the week after the CME hiked initial margin requirements and on reports that a Soros fund was exiting its commodity trade. Until now, the uncertain macro-economic and political environment has encouraged investors to own their piece of gold. Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. Big picture, the precious metal has become the currency of choice because of the heightened currency volatility.

The metals bull-run is far from over with speculators continuing to look to buy the commodity on these deep pullbacks, however, with inflation expectations dipping over the past few days has the weaker ‘long’s’ on the back foot and second guessing their outright positions ($1,508 +$16.08c).

The Nikkei closed at 9,794 down-65. The DAX index in Europe was at 7,432 down-60; the FTSE (UK) currently is 5,959 down-18. The early call for the open of key US indices is higher. The US 10-year eased 4bp on Friday (3.16%) and is little changed in the O/N session.

Treasuries advanced for a fourth consecutive week last week, pushing longer term product to their lowest yields in five-months, as plummeting commodity prices reduced inflation fears and investors sought refuge on rumors that Greece may exit the Euro-zone concerns.

This week the US treasury plans to sell $72b of long-term debt. They will auction $32b-3’s, $24b-10’s and $16b long-bonds. At the moment they certainly appear rich on the curve, expect dealers to cheapen that curve.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

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