EURO waits and waits

No one is sure if the Merkel-Sarkozy meeting can bear fruit. Will they produce a compromise on the controversial issue of private sector participation in new financing for Greece? Within the hour we will know. If not, the market will be giving back some of this morning’s premium and will have to rely on the European finance ministers to resume their talks on the second bailout package on Sunday.

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

Forex heatmap

Yesterday’s US data was all over the place. The Philly Fed factory index came in at a miserable -7.7 this month, mirroring the ugly Empire print and calls into question the durability of the US recovery. It was the weakest headline reading in two-years. With the factory sector normally the leading indicator for economic momentum, the market will now be worrying about how long this lack of growth scenario will last. All components of the index came in short, from factory orders to employment. An ISM-like weighting of the breakout produces a reading of 47.2, down from 52.6 and again in contractionary territory.

Weekly claims were a tad better, declining -16k to +414k, again above that psychological +400k barrier. The headline print was aided by an easy seasonal factor. Analysts note that going forward the market should be weary of seasonal factors aiding. The historical increased layoffs at car-plants may be ‘baffled by complications from supply chains abroad’, which may lead to unreliable seasonal reporting. On a more reliable note, the four-week moving average held steady at +424k. Digging deeper, continuing claims fell for a second consecutive week (+3.68m), while the number of eligible population receiving UI held steady at +2.9%.

US May house starts rose + 3.5% to +560k, better than market expectation of +540k. Giving a better performance was US May permits, rising +8.7% to +612k. Although positive, with housing having fallen to such low levels a significant increase is warranted to have any effect on GDP.

Finally, the US current account deficit rose in the first quarter (-$119b vs. -$112b), dragged higher by rising imports. Most of the increase in imports came from gains in industrial supplies such as petroleum, which was higher in price at the beginning of the year. With the US trade and budget deficits being so high it’s important that the US can attract foreign capital. This week’s TIC data showed that China was a big buyer of US debt, the first time in five-months.

The dollar is higher against the EUR -0.05%, GBP -0.15% and lower against CHF +0.05% and JPY +0.24%. The commodity currencies are weaker this morning, CAD -0.40% and AUD -0.33%.

The loonie has slipped against its US counterpart, shredding all technical levels, at one point yesterday weakened to its lowest level against the buck in three-months as renewed fears that Greece’s debt problems were out of control spurred a flight to safety. Better-than-expected US weekly claims and housing figures offered some relief, allowing the loonie to trim some of its earlier losses. 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. If oil prices continue to soften Canadian bulls can expect to see better buying opportunities (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 (1.0565).

Crude is lower in the O/N session ($92.62 -2.38c). Oil prices continue to fluctuate close to their monthly lows despite better than expected US claims data yesterday. Prices are not been influenced by this weeks bearish inventory data, but, rather by the negative economic news. With NY and Philly 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 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 inventory levels.

Gold rose for a third consecutive day yesterday as currency volatility has boosted demand for the precious metal as an alternative. Earlier in the week investors were required to sell 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%.

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 these pullbacks ($1,524 -$5.50c).

The Nikkei closed at 9,351 down-60. The DAX index in Europe was at 7,064 down-46; the FTSE (UK) currently is 5,649 down-49. The early call for the open of key US indices is higher. The US 10-year eased 6bp yesterday (2.96%) and is little changed in the O/N session.

With Treasury volatility the highest in two-months it has been easy for investors to get side-wiped. Up one day down the next, that is the US yield curve. Yields yesterday have backed up from their intra-day low (2.88%) on speculation that there is an EU and IMF agreement preventing a Greek default. It is anticipated that an announcement will be made this weekend. Let’s hope so.

A drop in US applications for UI, and a bigger gain in housing starts were a touch stronger than expected, but alone, provided little excitement to the market as it continues to focus on Greek headlines.

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. With the Fed expected to remain on hold for a considerable time is creating a new paradigm of longer term lower interest rates. Investors continue to reduce their bets on an increase in the Fed’s overnight lending rate. Dealers remain better buyers on pullbacks.

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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