A EUR sinking feeling

The Euro-region is up against it and is incapable of delivering the ‘grand bargain’ that is expected to solve the peripheral sovereign financing problems at this weeks Euro summit.

Policy makers are supposed to put pen to paper on an EFSF agreement. Not now, the region is now signaling that the final agreement for enlarging the EFSF lending capacity will not be reached until later in the second-quarter.

Periphery members are again pressurizing the EUR. The Irish, who are trying to reduce their loan coasts similar to Greece, have been temporarily swatted away by German officials. Even worse, the Portuguese Prime Minister Socrates, who resigned last night, failed to push through additional austerity cuts he promised the rest of the Europe two-weeks ago. This is threatening to push already high government borrowing costs to unaffordable levels and force Lisbon to be the ‘third’ periphery to seek a bailout.

Already this morning, a strong run of Euro flash PMI’s has taken some of the edge off Moody’s cutting 30 Spanish Banks ratings. Periphery uncertainty cannot keep supporting the EUR despite ECB hawkish rhetoric. These levels are providing a good excuse to up the ante against the EUR.

The US$ is mixed in the O/N trading session. Currently, it is higher against 12 of the 16 most actively traded currencies in another ‘subdued’ and contained session.

Forex heatmap

Just when you thought that things could not get any worse for the US housing industry, along comes another set of disappointing data. Yesterday’s US home sales fell -16.9%, m/m, to a record low of +250k units, much weaker than market expectations of a +290k print.

Not just a ‘total’ record low, all four US regions saw record lows, confirming that the market is weak nationally and this despite a January revision up to +301k from +284k. Worse still was the declining price data. For February, the median price fell by a record -13.9% and the average price fell -7.3% (not seasonally adjusted). Year-over-year, the median price is down just under-9%, the sharpest decline in two-years. Even worse was the months’ supply of houses rising to 8.9 from 7.4, the peak so far this year? Supply pressures will continue to put downward pressure on prices. This data is even weaker than the already disappointing US existing home sales print delivered earlier in the week.

The USD is lower against the EUR +0.13% and higher against GBP -0.08%, CHF -0.26% and JPY -0.03%. The commodity currencies are stronger this morning, CAD +0.29% and AUD +0.16%.

The loonie is determined to fluctuate close to this week’s lows despite oil, Canada’s largest export, printing a two-week high. The markets continue to focus on developments in Europe and somewhat ignoring, for now, all three opposition parties rejecting Prime Minister Harpers Budget earlier in the week, even when the government could fall by the weekend and an election to follow.

Weaker Canadian data this week has done little to tarnish the currency’s value. Big picture, support for the currency continues to come from commodities. On the face of it, the recent negative moves are oblivious to domestic fundamentals. Appetite for risk is sensitive to this weeks Euro-summit starting today. Investors are weary of any potential negative fallout.

The market it seems is in a wait-and-see situation. Uncertainty is not giving investors the tolerance for taking on more risk just yet. Expect the depth of the backup to be dictated by cross-action.

These dollar rallies continue to provide an opportunity to want to own some of the commodity and growth sensitive currency that is supported by stronger fundamentals and a sound fiscal position for the longer term (0.9795).

The AUD continues to trade close to a one week high, supported by investors pricing out the possibility of a rate cut and pricing in the chance of a rate hike again next month. The probability of a reduction in Australia’s benchmark interest rate on April 5 is 13%, down from as much as 34% last week.

Gains have been limited as regional bourses remain under pressure, damping demand for higher-yielding assets, and amid speculation a rally this week has been too rapid. By day’s end, its all about what happens at the Fukushima nuclear plant and the threat that G7 members will again be needed to calm the markets (1.0144)

Crude is higher in the O/N session ($106.33 +0.55c). Big picture, oil prices remain volatile, torn between the pressure of Japan’s demand loss and the Middle-East tensions. Any uncertainty adds a premium. Libya has seen its +1.3m barrels a day of oil exports cut off due to the month long rebellion and Western sanctions.

Market participants continue to worry how long the disruption will last and it’s this along with contagion fears in the region that is providing a bid, extending the commodity’s winning streak to six-days. Libya events this week is making it increasingly unlikely that investors will see a ‘swift normalization’ of Libyan crude-oil production in the near term.

Crude has been able to hold on to its gains despite the weekly EIA inventories reporting the expected supply increases. Stocks of crude rose +2.1m barrels last week, right on estimates. Unlike gas, whose stockpiles declined -5.3m barrels. The market had been expecting a drawdown of only-2m. Distillates (heating oil and diesel) were flat for the week, analysts had anticipated a decline of -1.5m barrels.

On deeper pull backs the Middle East and North African situation will continue to dominate.

There are a couple of reasons pushing the yellow metal towards new record highs. Unrest in Libya and the Middle-East coupled with Europe’s lingering periphery debt crisis is boosting the demand for the precious metal as an alternative investment. Fear of war will always provide a premium. With so much global uncertainty it’s difficult to find a reason not to own the precious metal.

The commodity’s bull run is far from over with investors continuing to look to buy the metal on dips. These price pullbacks are viewed as favorable opportunities for investors to continue to diversify into safe-haven assets and push for those new record highs.

Even hawkish global rhetoric has managed to support higher commodity prices. With the commodity being used as a store of value, the asset class is expected to remain better bid on deep pullbacks ($1,439 +$1.80c).

The Nikkei closed at 9,435 down-14. The DAX index in Europe was at 6,854 up+51; the FTSE (UK) currently is 5,822 up+27. The early call for the open of key US indices is higher. The US 10-year backed up 1bp yesterday (3.34%) and is little changed in the O/N session.

Treasuries erased earlier gains and ended yesterday close to home after the Fed bought less debt than average under its $600b program. Bonds had advanced on Japan’s nuclear turmoil, NATO disagreement on its role in Libya and Portugal’s debt crisis. Even the weaker than expected drop in US new home sales had some investors seeking the safety of government debt.

Euro-periphery yields have risen to a record high on concern euro-area leaders are struggling to find a comprehensive solution to the region’s debt crisis. Today is the beginning of the Euro-summit and expect something to be said to calm periphery negativity.

Investors can expect geopolitical and event risk in the Middle-East and Europe to continue to support FI on deeper pull back in spite of stronger economic data.

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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