EURO and Peripheries are in the Crosshairs

Euro policy makers are out in full force trying to talk down ‘restructuring’ Greece’s debt problems, their code word for default, as investors again set their ‘crosshairs’ on the Euro-peripheries.

According to Juncker, we should not be talking about a Greek restructuring, ‘because discussions of such sensitive topics only increase risks’. Wake up, it’s one of the realities, with few alternatives left what else is an investor supposed to think?

Greece has a ‘reasonable’ chance ‘of bringing its debt woes under control if it takes very considerable steps to consolidate its budget. This would include privatization and structural reform. According to policy members, Greece has a classic ‘competitive problem, while Portugal has an ‘economic growth problem’ and Ireland a banking problem. The market realty is that they have a ‘money problem’ and are probably bust.

Current price action is indicating that the worst the worst of the liquidation is not yet over. This dollar correction seems to have more room on the upside, and that’s going to pressure precious metals even further.

The US$ is mixed in the O/N trading session. Currently, it is higher against 10 of the 16 most actively traded currencies in a ‘volatile’ Euro-session.

Forex heatmap

Yesterday’s data showed that US trade deficit widened in March (+6% or -$48.18), more than expected, as soaring oil prices caused imports to outperform a record level of exports. The dollars performance again remained at the mercy of the Euro and market innuendos.

To date, the deficit has narrowed sharply during the global recession, with exports (+4.6% or +$172b) and imports climbing (+4.9% or +$220) as global economies improve. The US crude oil imports bill for the month climbed to $27.67b, with imports rising to 295.12m barrels. Digging deeper and on a positive note, US trade deficit with China contracted-4% as US exports surged. The Chinese delegation to Washington has given no indication that they will be speeding up the Yuan appreciation any time soon.

The USD is higher against the EUR -0.05% and GBP -0.37% and lower against CHF +0.07% and JPY +0.08%. The commodity currencies are weaker this morning, CAD -0.29% and AUD -0.90%.

The loonie reacted positively to a stronger than expected trade surplus print, but gave up these gains just as quick and then some, after the surprisingly strong weekly crude inventory report.

The surplus widened to $627m from an upwardly revised +$356m. Exports rose by +3.5% fueled by energy products, while imports on the other hand rallied +3.2%. Trade with its largest partner, the US, narrowed to +$4.8b from $5b. Governor Carney expects exports to remain firm, but has warned that the strong currency will eventually add to ‘long standing competitive challenges’.

Despite the Canadian Finance Minister stating that ‘Canada’s strong currency reflects confidence in its economy’, nervous weak longs are been forced to liquidate as risk off trading dominates this fragile market.

Last week, the CAD retreated from a three-year high as commodities plunged on concerns for Greece’s continued Euro membership, pushing investors to seek temporary sanctuary in the world’s go to safe heaven currency, the dollar, and this despite another stellar jobs report north of the forty-ninth parallel (+58k and +7.6%). The fundamentals and technicals for the loonie have not changed. Investors remain better buyers of the currency on dollar rallies, however, dollar sellers seem to be backing up their orders ever so slightly (0.9663).

The Aussie dollar was the biggest looser in the O/N section, dropping just under-1% outright, as the markets reacted negatively to the much lower than expected employment report. Dealers have cut the pricing for RBA rate hikes over the next 12-months by-11bp to+30bp. Total employment fell-22.1k last month, with the+49.1k fall in full-time employment more than offsetting the+26.9k rebound in part-time employment. The unemployment rate was unchanged at+4.9% as the participation rate fell-0.2 bps to+65.6%. This is only the third-monthly decline out of the previous 20-months. Its worth remembering that other Australian fundamental indicators ‘point to sustained employment growth and pressure on the unemployment rate to fall further’.

Aussie yields are still the highest in the G10 and do look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these pullbacks for the time being (1.0582).

Crude is lower in the O/N session ($96.84 -$1.37c). Oil prices have hit the skids, falling across-the-board after a surprisingly strong weekly inventory report and on the back of a cooling Chinese economy coming into focus. This morning, the IEA indicated that they have cut global demand as this years price rally begins to weigh on consumption. They have reduced its estimates for world consumption by-190k barrels a day.

US crude stocks rose +3.78m, much higher than the +1.4m barrels build up expected. Not to be left behind, gas inventories rose +1.28m barrels versus a forecast for a-200k barrel drop. This much larger build has grown because of gas demand being down year-over-year on higher prices at the pump cutting into demand ahead of the US peak driving season. Fundamentally, investors should expect further slippage of prices, to generate stronger demand and reduce inventories from current levels.

Higher oil prices have been denting demand growth and it’s this drop-off, combined with the overall retreat in commodities and a rising dollar that forced this drastic easing of oil prices this month.

Gold has ended its three session rally and retreated under the dollar pressure, eroding the appeal of the precious metal as an alternative asset. The fear that European officials may not grant Greece any further aid, forcing them to restructure their debt as the only alternative (code for default), has risk aversion strategies impeding the yellow metal’s recent rally. Technically, price action indicates that the worst of the liquidation may not be over.

Until now, the uncertain macro-economic and political environment has been encouraging investors to want to own their piece of the commodity. Unofficially, the yellow metal has become the currency of choice because of the heightened currency volatility and on the back of a questionable dollar value.

The metals bull-run is far from over with speculators continuing to look to buy gold on these deeper pullbacks, however, with inflation expectations dipping this month has the weaker ‘long’s’ remaining on the back foot and second guessing their outright positions as the market encroaches on significant support levels ($1,490 -$10.70c).

The Nikkei closed at 9,716 down-147. The DAX index in Europe was at 7,389 down-105; the FTSE (UK) currently is 5,909 down-66. The early call for the open of key US indices is lower. The US 10-year backed up 2bp yesterday (3.18%) and is little changed in the O/N session.

Dealers cheapened up the curve nicely ahead of the $24b 10-year auction yesterday, even with risk aversion trading strategies dominating. It was a solid auction yielding 3.21% with 3.00 times subscribed versus a 4-auction average of 3.01. Indirect bidders took +47.2% of the supply, below the +53.9% average, and direct bidders took +8.4%. Post auction saw solid demand for product as equities saw red. The market focus now shifts to today’s final sale of the week, 16b long-bonds. With global equities taking a beating, they should come a tad more expensive than expected.

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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