EURO Strangled by Options

The market seems to be waiting for a meaningful turn. A lack of new negative headlines on Greece is encouraging investors to buy back some of their risky assets, however, do not blink, you could miss the overnight price action.

The dollar has consolidated, with most G10 crosses, trading in narrow ranges, near recent highs. Soft US data and dovish comments from Fed’s Dudley has reinforced expectations that Ben and his band of merry men will not be raising rates for a long time. Remarks from BoC Governor Carney off the record yesterday, suggest that he does not see the US addressing its fiscal issues until after 2012 and that there would be no ‘meaningful’ tightening of monetary policy for a long time.

Stay alert for Canadian CPI and retail sales this morning, that is all the market has to chew on as ranges are been strangled by option deals thus far.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in an ‘orderly and subdued’ morning session.

US jobless claims fell for a second consecutive week last week (-29k to +409k), a tentative sign that the downward trend may have recommenced. The decline is being attributed to the ‘shake out of weather related problems, and supply shortages in Japan that have skewed the data in previous weeks. The market remains weary that the headline print is elevated and above that psychological +400k benchmark. The four-week moving average rose by +1.25k to +439k, w/w. Combing this with the up tick in the unemployment rate (+9%) would suggest that the economy is not adding jobs fast enough to reduce this. Digging deeper, continuing unemployment claims fell-81k to +3.71m (this is reported as a one week lag).

US home resale’s unexpectedly declined last month on widespread weakness (+5.05m vs. +5.20m), despite a downward revision to the previous month and the second contraction in three-months. What is also disturbing is that the month’s supply moved back above 9 (highest print in six months). This number does not even include the shadow inventories, suggesting that prices will remain depressed. For instance, distressed homes, which are typically sold at approximately-20% discount, continue to account for a growing share of total sales, currently sitting at +40%.

For a second consecutive month the Philly Fed manufacturing index plummeted, falling from +18.5 to +3.9 in May. Digging deeper, most of the subcategories were weak, apart from employment which rose from +12.3 to +22.1. The manufacturing sector continues to be influenced by supply chain disruptions in Japan. The subcategories that provided the losses were forward looking new orders, shipments, unfilled order index and the inventories index. The only sign of relief aside from employment were the price indices, with prices paid retreating as commodity prices eased and the prices received index dropping to its lowest level this year. The headline decline is proof of a ‘shocking growth decline’.
 
The USD is higher lower the EUR +0.05%, GBP +0.12%, CHF +0.15% and JPY +0.04%. The commodity currencies are stronger this morning, CAD +0.24% and AUD +0.29%.

The market is experiencing risk-on and off again trading, creating volatility within a tight range. Weaker than expected US data, coupled with softer commodity prices initially has tried to pare the loonies gains yesterday. The currency is being pushed and pulled indirectly while waiting for this morning’s inflation data to be reported and before investors commit to larger CAD positions.

With the rate market continuing to push out BoC hikes, is making the top side for the loonie outright more vulnerable. The currency this week has traded heavily against most of its major counterparts and at times been within striking distance of its two-month low outright. Until now, the pressure on commodities had been undermining the loonies’ progress, at the moment investors have shifted their focus back to ‘rate’ watching. The Bank next meet on the 31-May to determine their interest rate policy.

With 0.9800 barriers supposedly maturing at month end, the market will see defense maximized as expiries draw closer, providing resistance for the time being, despite the underlying momentum wanting to drag the dollar to test higher. Not helping the currency is the market waiting for Canadian inflation data tomorrow before committing to larger CAD positions. To date, risk sentiment has been stung over Euro-zone debt restructuring and on doubts about the pace of global growth. Investors are better buyers on these pull backs (0.9660).

The perception that the worse of the commodity sell off may now be behind us, has the Aussie dollar doing better in the last two sessions. It is also being supported by the uptick in the Asian equity class. The currency is heading towards its first weekly gain this month as improving economic indicators has increased demand for higher-yielding assets. The AUD is trading near a one week high as traders bet the RBA will raise rates by +30bp points over the next year.

Earlier this week, the currency was pressurized by Australian consumer confidence declining this month to the lowest level in almost a year. The Westpac sentiment index fell -1.3% to 103.9 from a month earlier. Not helping either was Moody’s downgrading the long-term, senior unsecured debt ratings of some of its leading domestic banks.

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 (1.0686).

Crude is higher in the O/N session ($99.42 +0.98c), but down on the week. After climbing in the previous session, crude again has slipped as the index of US leading indicators dropped (first time in 10-months) in April (-0.3%) and sales of existing US homes declined, signals fuel demand may weaken as the economy struggles to recover.

Weekly crude supplies fell-15k barrels to +370.3m last week versus an expected build of +1.7m barrels. Cushing supplies dropped -1.59m barrels to +40.0m, while imports were off-394k barrels per day to +8.54m barrels per day. Distillate stockpiles (heating oil and diesel) also posted a surprise draw, dropping -1.16m barrels versus expectations of a +700k build. On the flip-side and a surprise, was gas inventories growing as expected but modestly, rising +119k versus a forecast for a +800k barrel build. The refinery utilization rate rose +1.5% to +81.7% of capacity, much bigger than the +0.2% expected.

Technically, the report could be seen as overall bearish because of the weaker gas demand. Despite the market being awash with product, the long-term fundamental supply and demand of commodities is still pointing to higher prices.

Fed member James Bullard comments that the central bank may keep its monetary policy unchanged until late this year, and that declining inflation expectations have lessened the need to begin withdrawing record stimulus pressurized gold prices on speculation that slowing inflation will curb demand for the metal as a hedge against rising consumer prices.

The commodity is moving in tandem with oil and the risk-on-risk-off commodity trade. Investors are remaining nimble because of the gyrating dollar. The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,502 +$9.60c).

The Nikkei closed at 9,607 down-14. The DAX index in Europe was at 7,405 up+47; the FTSE (UK) currently is 6,012 up+57. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (3.17%) and is little changed in the O/N session.

Treasuries have fallen, pushing the 10-year yield up for the first time this week as equities and crude rallied and investors found less value in owning US product after the yield dropped to its lowest level this year. The FI market have pared their decline after weaker than expected US housing and manufacturing data.

‘Rates remain in this tight range, and despite seeming incredibly low, they reflect a Fed comfortable with the inflation and economic outlook and their ability to adjust’. Mixed US data this week has investors remaining better bid on these pull backs, providing bullish momentum for the FI asset class, who it seems want to register even lower record yields over the medium term.

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