Market Feels Vulnerable Long EUR

The Euro-zone is growing nicely (+0.8%). The morning’s data should reinforce ECB tightening expectations and the markets’ comfort with Spain’s continued ability to decouple from the smaller periphery debt markets.

The solid French and German reading drove the strength, while the story was all negative in the peripheries, with Portugal the biggest surprise, entering a technical recession in the first quarter. Naturally, the market was interested in how the austerity measures would have an impact on Greece’s growth, it recorded a +0.8% expansion on the quarter.

Big picture, the Chinese reserve ratio hike and the continued uncertainty over a bailout for Greece are weighing on risk sentiment. At theses levels, the percentage traders have been buying back some EUR as profit ahead of the weekend, but, they are running into an Asian selling wall.

The US$ is weaker in the O/N trading session. Currently, it is lower against 10 of the 16 most actively traded currencies in a ‘orderly’ session.

Yesterday’s US retail headline appears solid (+0.5%), but the details do reveal some weaknesses. Analysts note that higher prices appear to be the reason for another consecutive gain in nominal retail sales last month. The proof should be in the pudding when the St. Louis Fed releases the price-adjusted results later this month.

However, the details of the report suggest that the US consumer is starting to pull back on discretionary spending because of higher energy and food prices diluting their disposable incomes. Digging deeper, sales (ex-gas component) posted a modest +0.2%, m/m, gain as headline strength was very narrowly based in food and gasoline stations sales (+2.7%, m/m). Revisions contributed to the market miss on expectations, headline sales were revised up strongly from +0.4% to +0.9% while core-sales rose from +0.8% to 1.2%. The largest monthly gains were in the food and beverages and gas stations and because of their strong weighting they contributed heavily to the headline gain. 


Last month’s US PPI increase of +0.8% was very much in line with market expectations. The core (+0.3%) was marginally higher and the breakdown reads consistently with the uptick in inflationary pressures. It’s proof that the Fed cannot become complacent, even if the rise in energy prices is beginning to look like it has peaked. The new core trend of +0.3% for this year is a clear acceleration from last years +0.2% level. It is worth noting that food saw only a modest gain (+0.3% vs. +0.2%), which means that it was energy that pushed the headline higher, with a rise of +2.6%. Gas slowed to +3.6% from +5.7% in March, but natural gas spiked by +3.5% after easing -1.2% in the same period. Crude and intermediate data also looks firm at the core level, up by +2.6% and +1.1%. Analysts also note that the recent declines in oil prices should see some easing in PPI energy prices. Excluding energy, there is a pickup in inflationary pressures and should lead to new Fed debate.

Weekly claims in the States fell-44k to +434k and inline with market expectations. Despite falling back towards trend levels, it still remains elevated. Next week’s claims will cover May’s payroll survey week, and it’s fair to say with no significant change to the elevated trend we should expect some slowing in payroll growth. Despite the anomaly reasons given for last week’s spike, the two-week trend suggests some underlying deterioration with the underlying pace comfortably above the +400k mark. Digging deeper, continuing claims disappointed with a +5k rise to +3.756m, the-32k in emergency claims outweighed a +15k rise in extended benefits. The overall tone does not suggest a strong employment environment.


The USD is lower against the EUR +0.45%, CHF+0.05% and JPY +0.49% and higher against GBP -0.04%. The commodity currencies are stronger this morning, CAD +0.07% and AUD +0.15%.

The pressure on commodities continues to undermine the loonies’ progress. The order boards are very thin with corporate buyers backing up their bids. Yesterday’s weaker than expected new home price index unchanged in March after four previous gains provided little support fundamentally.

Despite the Canadian Finance Minister stating that ‘Canada’s strong currency reflects confidence in its economy’, nervous weak longs are been forced to liquidate as risk off trading dominates this fragile market.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). The fundamentals and technicals for the loonie have not changed. Investors remain better buyers of the currency on dollar rallies (0.9626).

The Aussie dollar is finding it difficult to find traction as investors sell on rallies with dealers pricing in the bet that Governor Glenn Stevens is poised to keep borrowing costs unchanged for the longest stretch in four years after further weak fundamental data this week.

Dealers have cut the pricing for RBA rate hikes over the next 12-months by-11bp to+30bp. This week, total employment fell-22.1k last month, with the+49.1k fall in full-time employment more than offsetting the+26.9k rebound in part-time employment. The unemployment rate was unchanged at+4.9% as the participation rate fell-0.2 bps to+65.6%. This is only the third-monthly decline out of the previous 20-months. Its worth remembering that other Australian fundamental indicators ‘point to sustained employment growth and pressure on the unemployment rate to fall further’.

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 these pullbacks for the time being (1.0682).

Crude is higher in the O/N session ($100.10 +$1.13c). Oil prices remain vulnerable, and have fallen this week after a surprisingly strong weekly inventory report, mixed with a cooling Chinese economy coming into focus. Yesterday, the PBoC raised banks’ reserve requirements for a fifth time this year to restrain inflation, underlining the risk that tightening measures will cause a slowdown in the world’s second-biggest economy.

This week US crude stocks rose +3.78m, much higher than the +1.4m barrels build up expected. Not to be left behind, gas inventories rose +1.28m barrels versus a forecast for a-200k barrel drop. This much larger build has grown because of gas demand being down year-over-year as higher prices at the pump cut into demand ahead of the US peak driving season. Fundamentally, investors should expect further slippage of prices to generate stronger demand and reduce inventories from current levels.

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 has forced this drastic easing of oil prices this month. The IEA indicated this week that they have cut global demand as this years price rally begins to weigh on consumption. They have reduced its estimates for world consumption by-190k barrels a day.

The dollars rebound this week has eroded the allure of gold for alternative investment purposes. With global equities under pressure from China’s inflationary stance, is bearish for commodities as investors are pressurized to taking profit with gold to compensate for losses with other assets. Last week, gold happened to give up +4.2% of its value.

The fear that European officials may not grant Greece any further aid, forcing them to restructure their debt as the only alternative (code for default), had risk aversion strategies impeding the yellow metal’s recent rally. Technically, price action indicates that the worst of the liquidation may not be over.

Until now, the uncertain macro-economic and political environment has been encouraging investors to want to own their piece of the commodity. Unofficially, the yellow metal has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions ($1,513 +$6.30c).

The Nikkei closed at 9,648 down-68. The DAX index in Europe was at 7,497 up+53; the FTSE (UK) currently is 5,997 up+53. The early call for the open of key US indices is higher. The US 10-year backed up 5bp yesterday (3.21%) and is little changed in the O/N session.

Dealers cheapened up the curve nicely ahead of the $16b 30-year auction, even with risk aversion trading strategies trying to dominate. It was not a solid auction, yielding 4.38%, 2.7bp behind the curve, with 2.43 times subscribed versus a 4-auction average of 2.76. Indirect bidders took +33% of the supply, below the +43% average, and direct bidders took +42%. Post auction saw solid demand for product with the new issue trading in the money.

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