EURO stampede persists

This is carnage and the mass liquidation of the Euro-unit is breaking all types of technical levels. The market is increasingly focused on the contagion risk Greece poses to European financials.

Major rating agencies are all out with new reports and downgrades tied to Greece’s woes and the lack of action taken by European leaders to hammer out a new financial plan. When will policy makes realize these peripheries are penniless? Any bailout received is just being recycled back to the ECB/EU/IMF.Restructuring of Greece’s debt looks increasingly probable as Athens lacks the political will to carry out wide spread privatization of state assets and budget tightening.

Two things to be weary of today, first, market is pricing in a better than expected Philly Fed survey. If we follow the ugly Empire of yesterday more investors will run for the exits. Second, watch for March 18 G7 coordinated intervention levels in EUR/JPY. Japan happened to make some noise this week that they will act to limit large moves in the yen.

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

Forex heatmap

In the middle of watching Greek protesters running amuck the market had to digest some very opposing and ugly US data. May CPI surprised to the upside with a +0.2% rise in the headline and a more worrying +0.3% rise in the core (ex-food and energy). This is the strongest monthly rise in nearly three-years, making it more difficult for helicopter Ben to implement QE3. Analysts’ have noted that the y/y core-CPI has accelerated to +1.5% from +1.3%. At this level it’s still within striking distance of the Fed’s mandate, however, the three-month annualized pace is accelerating, currently at +2.5% and up from +0.7% six-months ago and probably running too firm for the Fed.

The main sectors that lifted the core are the usual suspects, subjected to seasonal factors, apparel (+1.2%), lodging (+2.9%) and vehicles (+1%). On the downside, fall in other goods and services (-0.2%) and surprisingly energy prices (-2%), again seasonally adjusted. There is no room for complacency or we will be yelling stagflation again.

An ugly Empire State manufacturing print (-7.79) can be added to the long list of softer US data that makes it difficult to want to own risk. This is the first negative headline in eight-months and a complete surprise to the market who had expected the index to edge higher to 13.5. Digging deeper, four indices slipped into negative territory (new-orders, average employee workweek, delivery time and shipments), four other decelerated (inventories, prices paid, received and no. of employees), while unfilled orders fell to zero. More significantly, if we superimposed this as an ISM-like weighting then we have entered contractionary territory.

US TIC data showed that net foreign purchases of long term securities rose from $24b to $30.6b last month. The market seems to take very little notice of this release nowadays. It worth noting, China has added $7.6b to its net-treasury holdings.

The dollar is higher against the EUR -0.44%, GBP -0.45% and lower against CHF +0.15% and JPY +0.39%. The commodity currencies are weaker this morning, CAD -0.33% and AUD -0.49%.

The loonie has slipped against its US counterpart, shredding all technical levels, following weaker Canadian manufacturing data, a higher-than-expected rise in US core-inflation and a Euro-debt crisis driving investors to owning the dollar for surety reasons. Canadian manufacturers saw sales slip -1.3% in April, as expected, reversing much of the previous month’s gains as the Japan earthquake cut off supplies to the auto industry.

This week is quiet for Canadian data, so expect the currency to take its cue from risk appetite. When risk is on, the ‘loonie’ is coveted, when off, watch out.

So far this month the loonie has been at the mercy of its largest trading partner, on speculation that a slow recovery down south is curtailing demand. On the crosses the currency has performed relatively well, boosted by last week’s employment numbers.
Expect the Canadian dollar to be subjected to the pull of either risk or risk aversion trading strategies. Investors remain better buyers of Canadian dollars on US rallies (0.9826).

The AUD has weakened in the O/N session as a deadlock on aid for Greece has dampened risk and demand for higher yielding assets. Some of this weeks losses have been pared by RBA comments. Governor Stevens said that policy makers will need to raise interest rates at some stage. He reiterated a bias to raise the policy rate in the medium term in a speech earlier in the week and acknowledged that the slightly restrictive monetary and fiscal policy are currently constraining the economy. He believes that inflation is more likely to rise than fall despite the gains in the currency that further hikes are required to curb price increases. The markets believes that another inflation print above the 2-3% target will have policy makers hiking rates as early as August.

The risk-off mood remains dominant in the markets because of concerns over Greece and a slowdown in global growth, sending equities and commodities lower. AUD 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 (1.0514).

Crude is higher in the O/N session ($95.39 +0.58c). Oil prices have found it difficult to trade above that psychological $100 a barrel. Prices are not been influenced by inventory data, but, rather by the negative economic news. With New York manufacturing contracting and European debt crisis deepening is expected to reduce economic growth and eventually fuel demand.

Last week’s EIA report showed that oil inventories fell -3.41m barrels to +365.6m. The market had been expecting a -1.8m barrel decline. Stockpiles at the Cushing were down -1.14m barrels at +37.76m (NYMEX delivery point). On the flip-side, gas stocks rose +573m barrels to +215.07m, below market expectations of a +1m barrel gain. A market surprise was distillates (heating oil and diesel) posting a dip of-105k barrels to +140.82m (-5.2%). Analysts noted that the drop at Cushing can be explained away. It is the terminus of the Keystone pipeline (carries Canadian oil) which happened to be closed for a week. The refinery utilization rate fell -1.1% to +86.1% of capacity, compared with analysts’ forecasts for a slight increase of +0.3%.

Big picture, the market believes that the US has ample crude stocks, allowing WTI prices to remain in check, while the Brent market continues to price in lost production of preferred sweet crude from Libya. Economic headlines are more important to the market right now than the fall in inventories.

Gold is trying hard to rebound after posting its biggest one-day loss in a month earlier this week on growing worries about another global economic downturn. Previously, investors sold the yellow metal to cover losses in other assert classes as margin calls increased. Last week, the metal dropped -0.9%, the first decline in five-weeks. Year-to-date, the commodity has climbed +7.6%.

The market had expected gold to rally this week on the back of the dollar losing some of its bid momentum. That’s not happening. Dollar weakness tends to lift gold prices, as it makes dollar-priced assets cheaper for other currency holders and boosts the precious metal’s appeal as an alternative investment. Fact, investors are boosting their demand for precious metals as a protection of wealth.

Big picture, the yellow metal remains in demand on speculation that borrowing costs in the US will remain low after economic data signaled that the recovery may be faltering and on the back of Bernanke’s comments that further stimulus is required. The Euro-carnage will continue to support gold buying.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity higher. 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 commodities on deeper pullbacks ($1,526 +0.10c).

The Nikkei closed at 9,411 down-163. The DAX index in Europe was at 7,079 down-36; the FTSE (UK) currently is 5,700 down-42. The early call for the open of key US indices is higher. The US 10-year eased 13bp yesterday (3.01%) and is little changed in the O/N session.

Up one day down the next, that is the US yield curve. Yield’s fell from their monthly highs after some ugly US data yesterday, where Empire manufacturing unexpectedly contracted. European disagreement is threatening to delay the next rescue payment for Greece. Bonds did try to pare some of their advance after a higher US core-CPI print. However, risk aversion trading strategies was the order of the day.

Also supporting the bond market was China’s holding of treasuries advanced for the first time in six-months. Bernanke’s comments earlier this month continues to provide fodder for the bulls to want to own longer dated product. The reality, record monetary stimulus is still needed to support US economic recovery. It seems that market consensus has us believing that there’s going to be another dip in economic growth and that will require a QE3 package. However, yesterday’s inflation data does provide a problem for policy makers in that regard.

With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates. Dealers are better buyers on these pull backs.

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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