EUR oversold positions gone the currency can slide

It seems that investors have been caught napping in the European session. The EUR has come into some profit taking, being knocked lower vs. the dollar and JPY. With most of the oversold positions in the EUR now gone, the currency will be vulnerable to ‘any’ negative news. For the better part of the session, market sentiment had been positive, boosted by the news that China’s exports had increased, which is proof that the Euro economy’s heart is beating or is it just Germany’s? On further scrutiny, China’s export numbers are price supported not volume depended. Earning’s season and Japans PM Kan will certainly mix-up today’s session. Losing control of the upper house makes Kan’s debt restructuring policies more difficult and should put the JPY under further pressure with credit rating talk in the air. Let’s see how successful Greece will be in raising funds on the open market tomorrow. A Spanish surprise supported the EUR.

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 ‘whippy’ trading range.

Some surprising data from China at the weekend will have the US protectionist support teams up in arms again this week. China’s June exports rose +43.9%, y/y, surpassing analysts expectations of a +38% print, while imports advanced within expectations (+34%). We will be hearing increased rhetoric that since China announced that it was de-pegging its currency from the USD, just before the G20 in Toronto, the pace of the appreciation of the Yuan is not fast enough for the global economy. Since the announcement the renminbi has appreciated +0.8%. ‘An undervalued exchange rate is an artificial boost for Chinese exporters, robbing other countries of jobs and growth’. On the flipside, stronger Chinese data is proof that the global economic recovery remains on track despite worries about a fresh slowdown.

The USD$ is higher against the EUR -0.36%, GBP -0.53%, CHF -0.61% and JPY -0.10%. The commodity currencies are mixed this morning, CAD +0.03% and AUD -0.62%. It is not rocket science to understand the reasoning for the loonie to print a new monthly intraday high on Friday. The unemployment report blew all analysts estimates out of the water as the Canadian economy created +93k new jobs. The sub-categories were significant, with a strong full-time (equivalent to +500k jobs in the US), strong participation rate and a significant psychological sub +8% unemployment rate (+7.9%) pushed the currency to test the 1.0300 level. It’s difficult to find any technical or fundamental reason to ‘not’ own the currency, whether it’s growth, the BOC attempt to normalize rates (+0.50%) somewhat or as a safer-haven proxy. Couple this with commodities, like crude threatening to push much higher on risk-on positive sentiment buoyed by the IMF’s global growth forecasts, has speculators wagering bets that the CAD will outperform other economies whose monetary policy is expected to experience a prolonged period of near-zero benchmark rates. For most of this month, the loonie has followed equities, in fact, the currency has a +85% correlation with the Dow. If the BOC remains in a ‘normalizing’ rate mood then the currency will be more sought after. On the crosses, CAD is holding its own and under normal conditions is seen as a safer way to play a global economic recovery with links to commodities and less banking. Speculators had been betting that Cbanks will up the ante and use the currency as a safe haven destination for capital.

The AUD has managed to retreat from its highest level in three weeks amid speculation that the recent rally was overdone, as various segments continue to tout their concerns over the strength of the global rally. Technically, the AUD has had a bumper ten day trading session, now the market wants to sit back and inhale ‘new’ data before aggressively wanting to own the currency again. Last week we saw that there was nothing better to drag a currency higher that strong employment numbers. The Australian economy added three times as many jobs than had been forecasted (+45.9k vs. +15k) earlier this week. With global stocks and commodities also rising, boosted the demand for currencies tied to growth. Fundamentally, with a strong domestic growth base it is buffering the economy from any outside negative influence at the moment. Last week, Governor Stevens left the cash O/N rate unchanged for a second consecutive month (4.50%). In his following communiqué, the RBA stated that consumer spending and business investment are expanding. Policy makers are ‘reinstating their view that domestic growth will be about trend’ and are ‘not alarmed by the global demand backdrop’. In retrospect, policy makers remain ‘very upbeat’. This has disappointed the ‘dove’s positions’. A strengthening job market may escalate pressure on inflation and the need to hike domestic rates again sooner rather than later. The market continues to speculate that the Fed will keep interest rates at a record low to aid a ‘waning US recovery’, is preserving the regions yield advantage. With the crisis in Europe not having a material impact on the Australian economy has ‘bulls’ better buyers on pull backs. Be wary of commodity prices, market euphoria can only love the currency so long (0.8726).

Crude is lower in the O/N session ($75.37 -72c). On Friday, crude, boosted by equities, managed to pare some of its gains after the weekly EIA report last week. The headline print revealed a drawdown of -5m barrels, somewhat inline with market expectation because of hurricane Alex, but, it was the other subcategories that were capable of reining in the price advance. The EIA reported an increase of +1.3m barrels for gas stockpiles and an increase of +300k for distillates stocks (heating and oil). While the headline for crude is bullish, the numbers for gas was bearish. Analysts believe that the gas markets numbers continue to show ‘lackluster demand and will put pressure on the entire energy complex in the days to come’. The EIA revealed a larger than expected increase in natural-gas stockpiles to +78 bcf vs. +60 bcf’s. Currently there are too many negative variables that support the bear’s short positions. Direction is dictated by demand and investor confidence, with ample supply and global growth worries, speculators would prefer to sell on rallies.

The ‘yellow metal’ had the largest rally on Friday in three week’s as investors demanded the commodity that had been trading close to its technical lows, sub $1,200, for a few day’s. After falling to a 6-week intraday low earlier last week, the commodity has found its sea legs somewhat, as investors weigh ‘the signs of hope in the US labor market against concerns of impending European bank stress-tests (July 23). A stronger EUR last week had reduced demand for the metal as a haven. Technically, the bullish sentiment has been on hiatus with profit taking testing the medium term support levels. Fundamentally, in the short term the metal will find it difficult to rally aggressively, as historically, this is the ‘slowest’ season for physical demand. India, the world’s biggest consumer, expects imports to plunge as much as -36% this year. Despite this, longer term view, market concerns over global economic growth is supporting the ‘yellow’ metal, at least until the technical support of $1,175-80 is broken. Year-to-date, the commodity has gained +11.5% as investors have been content in using the commodity as a hedge against any European holdings, believing that the EUR has not bottomed out just yet ($1,207 -$1.02c)!

The Nikkei closed at 9,548 down -37. The DAX index in Europe was at 6,068 up +3; the FTSE (UK) currently is 5,139 up +6. The early call for the open of key US indices is lower. The US 10-year backed up 2bp on Friday (3.05%) and eased 3bp in the O/N session (3.01%). Debt prices ended the week on a soft note, mostly on the back of investors diminishing concerns that the US will slip back into a double dip recession. Also on investors radar, is the US governments auction of $69b’s worth of new product this week (3’s $35b, 10’s $22b and Bonds $12b). Throw in a revised IMF forecast for global growth, +4.6% vs. an April estimate of +4.2, warranted dealers to cheapen up the curve and keep 10-year yields above the +3% level. With the current market sentiment dealers will want to sell product on up-ticks. However, this morning global bourses are finding it difficult to gain momentum and investors may look towards the FI market.

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