Convinced by the EURO rally?

Risk sensitive currencies continue to be pulled in either direction by risk and aversion trading strategies. There seems little conviction in investors’ actions, with some currency moves remaining modest.

Even with a strong Euro retail sales print (+0.9%) and a German factory orders release this morning (+2.8%), price action remains tentative as the EUR extends this morning’s rally. 1.47 option barriers are expected to slow the ascent. However, it’s the dollars demise that is providing most of the momentum even as the EUR enters overbought technical territory. The EUR feels it wants to stall and sputter.

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘whippy’ session.

Yesterday, with little data to chew on and a historical trend to uphold, where the first trading sessions after an NFP release tends to be the quietest session for the month, currency moves were modest. The EUR did happen to wobble ever so slightly on the fear of eventual Greek debt restructuring and the prospect of an investor run on other sovereign debt of financially distressed Euro-zone countries. In reality, there are many lingering unanswered questions that should prevent significant upside to the EUR in the short term. Some German officials remain unconvinced about the Greek bailout plan, referring to it as a whitewash solution. The Greek ‘populous’ opposition continues to grow stronger and contagion remains an ongoing concern. Combined these create an immediate opposition for an extended EUR rally.

The dollar is lower against the EUR +0.69%, GBP +0.61%, CHF +0.18% and higher against JPY -0.11%. The commodity currencies are mixed this morning, CAD +0.54% and AUD -0.07%.

Yesterday’s data has done little to alleviate the loonies woes. The currency is trading close to its yearly lows due to its strong trade association and proximity to the US. Canadian building permits plunged yesterday (-21.1%), wiping out nearly all of this years gains and has analysts questioning the strength of the Canadian construction industry. The trend for building permits and housing starts remains in negative territory and certainly does not support a rate hike by Governor Carney next month. However, Canadian Ivey PMI blew all expectations out of the water (69.1 versus 57.8), a very strong print that balances out the more recent subdued indicators such as building permits.

Last week, the BoC kept their key interest rate unchanged (+1%) and said they will raise it ‘eventually’ as the economy recovers. Policy makers indicated that the recovery is ‘proceeding largely as expected’ and that any rate increases would be ‘consistent with achieving the +2% inflation target’. The Canadian bulls who read the BoC’s communiqué as being hawkish should be happy that they are getting better levels to own the currency.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies. Longer term strategists will wait for this Friday’s employment report before committing to longer term trading positions. Most investors continue to look for better levels to own the loonie (0.9770).

The RBA surprised markets earlier this morning with a slightly dovish monetary policy statement after holding rates steady. They kept rate unchanged for a sixth straight meeting as signs of slower growth from the US and China dimmed prospects for an acceleration in domestic employment.

The RBA would ‘assess carefully’ the outlook for inflation at future meetings. Analyst’s note that Governor Stevens in his statement softened the tone of the penultimate paragraph by replacing the concern that ‘over the longer term inflation can be expected to increase’ with a more specific ‘inflation will be close to target over the next 12 months’. To date the RBA has also relied on the currency’s strength to tighten monetary conditions.

The market does not seem too down beaten by the recent data releases, especially after the RBA had signaled recently in the Statement of Monetary Policy that an anticipated fall in the first quarter growth is likely to be temporary and forecasts a strong rebound to +4.25% in the fourth quarter. Traders are betting that there is a 60% chance of a rate hike in the third quarter. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0693).

Crude is higher in the O/N session ($99.28 +0.22c). It was no surprise that crude prices would come under further pressure this week after Friday’s disappointing US employment number. The commodity has been extending last week’s decline ahead of tomorrow’s OPEC meeting in Vienna. It’s expected to be a contentious affair. Some analysts believe that if quotas remain on hold it would provide the excuse to add a $3-5 premium to a barrel of crude. The current global data suggests a falloff in economic activity and a decrease in demand, but if this happens OPEC will only have to tighten their supply.

Last week’s EIA release showed that supplies rose +2.88m barrels to +373.8m, the highest level in two-years. Analysts had expected supplies to fall by -1.6m barrels. Continuing the streak, gas inventories increased for a fourth-week, climbing by +2.55m barrels to +212.3m versus an expected gain of +900k barrels. In contrast, distillate stocks (diesel and heating oil) fell-976k barrels to +140.1m, the lowest level in two-years.

Big picture, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash. However, the US driving season has begun and consumers will speak with their wallets. All eyes remain on OPEC’s actions, if any.

Gold remains better bid on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering, hurting the dollar and boosting the appeal of precious metals. The weaker dollar sentiment is creating a positive metal scenario. Low rates are going to be dollar negative and gold positive.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher this month. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks ($1,549 +$1.90c).

The Nikkei closed at 9,442 up+63. The DAX index in Europe was at 7,135 up+50; the FTSE (UK) currently is 5,881 up+18. The early call for the open of key US indices is higher. The US 10-year backed up 2bp yesterday (3.02%) and is little changed in the O/N session.

The market is pricing in some concession ahead of this week’s US funding requirements, specifically concentrating on the long end of the curve. US 10’s trading sub +3% has many wondering is Q3 around the corner. Yields seem to want to print new yearly lows daily. The US government will auction $32b of three-year notes today, $21b of 10-year debt tomorrow and $13b of 30-year bonds on Thursday.

The Market should not expect too much of a back up given the recent data and as traders increase speculation that Bernanke and company will hold its target rate for overnight lending at virtually zero into next year. The market will have to wait to get some bad news on inflation before giving up on this bull bond scenario even as we piggyback record low yearly yields.

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