EURO Bulls Reloading?

Euro-zone debt concerns have in no way faded, but they are taking a back seat at the moment. Peripheral markets are bouncing back this morning amid a general relief rally, with Portugal debt trading leading the way.

King’s hawkish comments about inflation have woken the FX market out of its own stupor. He sees inflation pushing up wage demands. The softness in the economy is only temporary and the vital rebalancing ‘act’ is underway. Sterling has got its boost, as the BoE signals rate increases in the third quarter.

The US$ is mixed in the O/N trading session. Currently, it is lower against 9 of the 16 most actively traded currencies in a ‘subdued’ session.

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US data yesterday was dollar insignificant as capital markets took its cue from Euro-periphery debt announcements and concerns and this despite a better than expected print for both wholesale sales and inventories for March. The inventories growth (+1.1%) was just as strong without including petroleum products and should provide support for first quarter GDP estimates.

Breaking it down, inventories were mixed in the durable goods category, while there was widespread strength for the nondurable goods sector. Petroleum inventories rallied less than expected (+1%) for February and March, however, the running three-month average remains over +50%.

Sales were strong in every category bar two (+1.4%), with the inventories-to-sales ratio slipping to 1.130, the lowest on record. Analysts note that it was a good report from the wholesale activity perspective, but they also state that the larger affect of petroleum product price surges have not been felt yet.

The USD is lower against the EUR +0.01%, GBP +0.26%, CHF +0.10% and JPY +0.28%. The commodity currencies are stronger this morning, CAD +0.01% and AUD +0.01%.

Last weeks rebound in USD/CAD prices on risk-off flows slowly came undone yesterday as risk appetite made a comeback across-the-board. The commodity indices rallying have also provided the bid tone for the loonie. Fundamentally, this rebound has been capable in overshadowing S&P’s cutting their ratings for Greece.

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 as the currency trades pound for pound with commodities(0.9523).

The AUD has rallied for a fourth consecutive session O/N, on bets that Governor Stevens will begin another tightening cycle sooner rather than later and ahead of an employment report this evening that will show job growth climbing for a second consecutive month. The currency attempted to pare some of their earlier gains after a Chinese report showed inflation rose by more than expected, heightening speculation that the PBoC will tighten monetary policy again soon.

The global commodity boom is supporting the Australian trade surplus and is leading to an increase in both the price of and demand for hard commodities and the Aussie dollar outright. The currency has been able to rebound from last weeks lows after the RBA sounded ‘surprisingly’ hawkish in its Statement of Monetary Policy. Governor Stevens has indicated that market pricing of ‘one’ hike over the next year is not enough. Underlying inflation is now expected to be above its 2-3% target band by the end 2013.

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 pullbacks for the time being (1.0874).

Crude is lower in the O/N session ($103.65 -0.23c). Oil prices are tracking the dollar. There is currently a strong correlation, keeping their inverse relationship alive. The market is weary of this morning’s inventory report. The recent purging in most asset classes is overdone. Commodity prices have been experiencing a technical rebound after last weeks-15% haircut, the biggest drop in three-years.

Acting as an obstacle for crude prices was last week’s EIA report, which was much more bearish than expected. The data showed crude stocks rising greater than market expectation, signaling less demand from refiners. On the flip side, gas stockpiles and inventories of distillates (heating oil and diesel), both fell, upsetting market forecasts.

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. Expect the energy market to find support below current levels.

Gold prices remain elevated as investors take advantage of last week’s free fall to enter the market. The uncertain macro-economic and political environment has encouraged investors to want to own their piece of the commodity. Big picture, the commodity 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 ($1,525 +$8.50c).

The Nikkei closed at 9,864 up+46. The DAX index in Europe was at 7,536 up+35; the FTSE (UK) currently is 6,015 down-4. The early call for the open of key US indices is higher. The US 10-year backed up 4bp yesterday (3.21%) and is little changed in the O/N session.

There was a U-turn in FI prices just as we traded on top of their lowest yields this year. Treasury prices fell, pushing 10-year yields toward this week’s high, as the government comes to the market with $72b’s worth of product this week and on the back of PIMCO, the worlds largest bond fund increasing their negative bet against US debt.

The $32b 3-year auction was fair, yielding +1%, with a strong 3.29 times subscribed versus a four auction average of 3.12. Indirect bidders took down 32.7% of the issue, while direct took 15.3%. Today we get the $24b-10’s and tomorrow the $16b long-bonds. They both continue to appear rich on the curve.

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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