EUR value under discussion this week

It’s time to discuss. The reality, the market does not expect the Euro-finance ministers to make a final decision today on any Greek additional assistance. They will wait on the EU/IMF’s fourth mission to the region to complete its conclusions later this week. Even the disturbing developments in New York over the weekend should not have a material affect on their decisions. Most importantly, the market is seeking assurance that the latest pressures on Greece will not be ‘systemically damaging’.

How is Greece going to find the €27b it needs to fill its 2012 ‘funding gap’? The most likely option is a continuation of EU/IMF support, through an extension of the initial aid package or through Greece’s access to EFSF funding. Maybe, if the Greek government were to speed up its privatization plan and attempt to reduce its deficit faster, they could in theory, achieve their funding needs. Sometimes politically, it’s easier to put your hand out and ask for more than tighten ones own belt!

The US$ is mixed in the O/N trading session. Currently, it is higher against 11 of the 16 most actively traded currencies in a ‘volatile’ morning session.

The USD is lower against the EUR +0.04%, CHF +0.46% and JPY +0.02% and higher against GBP -0.09%. The commodity currencies are weaker this morning, CAD -0.44% and AUD -0.25%.

The pressure on commodities continue to undermine the loonies’ progress. Last week, the currency dropped for a second-straight week for the first time in four-months, as crude prices continued their slide, one week after plummeting the most since December 2008. The order boards remain very thin with corporate buyers backing up their bids for the currency. Now with investor’s perception that commodities may have got ahead of themselves, technically has the potential to push the commodity sensitive currency’s much lower in the short term.

Already this month, the CAD has 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. This week’s Euro-finance meetings will certainly set the appetite for risk (0.9744).

The Aussie dollar continues its slump, and trades near its three week low on commodity declines curbing the demand for the nation’s assets. Also, not aiding the currency was a government report showing home-loan approvals unexpectedly dropped to a 10-year low in March(-1.5%) as higher interest rates deterred homebuyers. Dealers have cut the pricing for RBA rate hikes over the next 12-months by-11bp to+30bp. Declines in the currency have been tempered before the RBA publishes minutes of its May 3 meeting this evening and before the government releases first-quarter wage data on May 18. The market expect the release to be a little hawkish.

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 (1.0527).

Crude is lower in the O/N session ($97.86 -$3.20c). Oil prices remain vulnerable, and fell last week after a surprisingly strong weekly inventory report, mixed with a cooling Chinese economy coming into focus. 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.

Weekly 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 that they have cut global demand again, 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 is eroding 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.

Investors continue to unwind that long-commodity, short-dollar trade. Until now, the uncertain macro-economic and political environment has been encouraging investors to want to own their piece of the gold. 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 ($1,496 +$3.20c).

The Nikkei closed at 9,558 down-44. The DAX index in Europe was at 7,317 down-80; the FTSE (UK) currently is 5,881 down-44. The early call for the open of key US indices is lower. The US 10-year rose 2bp on Friday (3.16%) and is little changed in the O/N session.

Treasuries fell for the first time in five weeks last week as mixed domestic economic data and a rebound in commodities cooled demand for the safety of US debt. Recent data is creating a very choppy trading environment.

Fundamentally, US yields remain historically low as the economy is finding it difficult to generate enough forward momentum to suggest rising prices will ‘be passed through the underlying rate of inflation’.

Dealers last week cheapened up the curve nicely ahead of the $72b of new product that came to the market. Because of the US mixed data and the Euro-political situation investors continue to find value on these pull backs.

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