No ‘We’ in EURO hurts Currency

Last week ended on a sour note with the market being spooked by default provisioning talk. This morning the market continues to price in that Greek possibility. The G7 have done a lousy job in boosting investors confidence last weekend, their self-interested approach is creating a more unstable trading environment this morning. They did however vow to support banks and buoy slowing economic growth as the EU debt crisis threatens a global recession. For investors, this does not seem to be enough!

The negatives continue to pile up against the EUR. ECB member Stark resigning, the Germans preparing covert plans for a periphery default, Greek Prime Minister Papandreou trying to convince the open market that his governments top priority is ‘to save the country from bankruptcy’ is being ignored by investors, French banks slide on a possible Moody’s cut. This has only been since Friday. We have not even mentioned regional data effects yet.

It’s follow the Germans and see what they do. Whatever Merkel and her policy making individuals decide the rest of Europe will follow as they do not have a long term alternative just yet. It’s patch up work policy done at its best!

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’ trading session.

The market had been expecting more from the finance ministers meetings last weekend. The G7 meeting produced no new policy action or indication of support for joint intervention in the FX market. This jaded response was expected as governments remain focused on their individual national interests rather than policy coordination. The G7 statement did not mention Japan’s August intervention actions. By that no response, the market should read this as a thumb’s up to Japans ‘unilateral’ FX approach. They are on their own so it seems.

The dollar is higher against the EUR -0.38%, GBP -0.39%, CHF -0.18% and lower against the JPY +0.92%. The commodity currencies are weaker this morning, CAD -0.12% and AUD -1.45%.

The loonie completed its biggest weekly decline in a month on Friday outright, breaking through parity, as the Canadian economy unexpectedly lost jobs (-5.5k) and risk appetite dropped on concern Europe’s debt crisis is worsening. It was the second consecutive negative week as the BoC kept rates on hold as expected(+4.75%). Upcoming data this week for its largest trading partner may indicate that both industrial production and sales may have slowed.

Governor Carney has applied the expected ‘dovish’ tone on the Canadian economy, explicitly noting ‘the need to withdraw monetary stimulus has diminished’ which is an ‘expected about-face from the July statement. Similar to Trichet, the market expects the Governor will be turning towards becoming more concerned about global growth. For the time being, futures traders anticipate the BoC to remain on hold until the end of the third quarter of next year.

Canadian data of late has done little to have an impact on the loonie’s price action (last month the currency lost -2.3% and completed the first losing month in three), that has been left up to investors own attitude towards risk. When weak, the currency has been underperforming. One of the historical reserve currency, the USD, has been able to rally to a six-month high versus the EUR on concern that ‘European policy makers are failing to find the ideal solution for the region’s debt crisis’

Global focus remains firmly on the Germans. What are they to do with Greece? They remain reluctant to provide any more help. Risk remains the dominant trading them, lack of it or appreciation for it, which ever one, shattered consumer confidence will try to have investors staying closer to home (0.9971).

Last week down-under, markets reacted somewhat favorably to Obama’s ‘job’s speech’. The initial reaction for the Aussie was to rally and even pare some of its weekly losses outright. Data out of China indicated that inflation cooled last month from a three-year high had also helped the AUD, easing concern that the PBoC would take further steps to curtail price gains. However, the ground rules have changed despite the Investor seeming to seek an alternative to the USD and EUR. Previously, there had been strong demand for the AUD on some these deep pull backs.

In the o/n session the AUD has tumbled to a new three-week low on fears that Greece may default has prompted investors to sell higher yielding assets. Domestic data again comes in on the weaker side and not aiding the currency. Aussie Trade balance reported weaker than expected with the priors also revised downwards (1.83b vs. +1,92b). It’s a risk-off market today. It’s going to be very tough for the Aussie to outperform while all eyes are on European issues.

However, it seems that some investors believe that the currency cannot lose. If US data continues to improve then local market pricing for interest rate cuts by the RBA will evaporate. On the flip side, if US data takes a turn for the worst, then the AUD will benefit from a weaker dollar. Now that this growth and interest rate sensitive currency would likely be supported on both poor and strong US data, certainly favors a test to trade higher. Currently, investors are better buyers of Aussie dollars on pullbacks as long as a risk loving environment remains (1.0310).

Crude is lower in the O/N session ($85.75 down-$1.53c). Oil prices fell-2% after the EUR declined to a six-month low on Friday and after Euro-banks and sovereign credit risk surged to all-time highs. The positive correlation relationship between the EUR and commodities remains intact. Even Obama’s job plan has failed to boost investor confidence.

Last week’s EIA inventory report revealed that crude stockpiles decreased by-4m barrels to +353.1m, but are above the upper limit of the average range for this time of year. Not as radical but on the flip side was gas inventories move higher by +200k barrels last week, after shedding -2.8m barrels in the prior week, and are in the upper limit of the average range. Analysts were expecting crude inventories to dip by-2m barrels and gas stocks to shed by -1.4m barrels. It was certainly a bullish report for prices. Oil refinery inputs averaged +15.5m barrels per day during the week, which were +6k barrels per day above the previous week’s average as refineries operated at +89% of their operable capacity.

For the moment, Crude prices continue to hold, however, the possibility that Libya may be able to export oil cargo this month, for the first time in six-months, should pressurize the asset class further.

Gold rose for the second straight day on Friday as renewed concern that the Greek debt crisis will worsen and signs of a slowing global economy spurred demand for the metal as a store-of-value. Before, the bulls had been taking a beating, as a rebound in global equities earlier in the week eroded demand for an alternative asset and pushed investors to sell the metal after its rally to an all-time high earlier in the month.

The bulls believe that commodity prices have recently undergone a strong correction, followed by a decent consolidation and particularly as European sovereign concerns escalate. Investors are guessing that the Fed will be required to ease monetary policy in answer to stimulate their economy. The Fed’s efforts to drive interest rates lower to support lending should curtail the dollar’s appeal and by default, support commodities. The commodity is heading for its eleventh consecutive annual gain ($1,852-$7.40c).

The Nikkei closed at 8,535 down-202. The DAX index in Europe was at 5,045 down-148; the FTSE (UK) currently is 5,143 down-71. The early call for the open of key US indices is lower. The US 10-year eased11bp on Friday (1.90%) and is little changed in the o/n session.

Treasuries rose for a second straight week, pushing the benchmark 10-year note yield to a new record low Friday, on speculation that Germany is or has prepared plans to shore up its banks if there is a Greek default. Capital markets confidence continues to take a battering, pushing investors to seek refuge on concern that both the US and EU officials are not moving fast enough to relieve the financial stress.

This week, the US treasury will issue $32b 3’s, $21b 10’s and $13b bonds near record low yields. Dealers will be expected to cheapen the curve ahead of supply and make the government pay up for some of the issue.

*4:00 pm
-USD| FOMC Member Fisher Speaks|
*13th-17th
-NZD| REINZ HPI m/m| -0.6%
*6:45 pm
-NZD| FPI m/m| 2.0%
-NZD| Manufacturing Sales q/q| 2.9%
*13th-19th
-GBP| Nationwide Consumer Confidence| 49
*7:01 pm
-GBP| RICS House Price Balance| -22% vs. -22%
*9:30 pm
-AUD| NAB Business Confidence| 2
*13th-17th
-CNY| Foreign Direct Investment ytd/y| 18.6%

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