Euro has found its Mojo for now

Is this false hope? Germany softening its stance on restructuring demand is helping the EUR. While the market focuses its attention on the Germans, its the Greek’s ability to do or not do that we should be honing in on.

No demand of an early rescheduling of Greek bonds is certainly good news, paving the way for the Euro-zone to put together another rescue package to aid Greece in meeting its repayment objections over the next few months. However, this does not mean that an eventual restructuring of their debt will not go ahead.

What if Athens fails to keep up its end of the bargain? The need will become more urgent. The EU requires all party support in Greece and continue to press for ‘vigorous international supervision’, in other words, a greater say in how Greece is run.

The reality is that the Euro-zone will spend the next few weeks putting together another aid package to stave off restructuring while internally the Greeks will continue to drag their feet on introducing structural changes, then we are back to square one!

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in a ‘volatile’ session.

Forex heatmap

The Kiwi is again leading the rally in risk-sensitive currencies now that European reports confirm that Germany is softening its stance on the Greek finance issue. The Yen bears can breath easier after Japan’s sovereign credit rating was put on review for downgrade by Moody’s, allowing the dollar to push north of 81 again to breath life into that trade.

The dollar is lower against the EUR +0.93%, GBP +0.19%, CHF +0.13% and higher against JPY -0.70%. The commodity currencies are mixed this morning, CAD +0.62% and AUD -0.01%.

Canadian GDP data disappointed yesterday (+3.9% versus +4.1%). It was not the headline but the meat of the data that was disturbing. Analysts noted the ‘heavy role played by inventory accumulation while several other key sectors like consumers and government were flat all serve to put a strong dent in the headline’. Consumer spending was flat and so was government spending such that neither sector contributed to growth.  Net trade was a drag, as import growth of +2.2% out stripped a +1.6% rise in exports. Growth was recorded in inventory investment, soaring to +$10.5b in the first quarter from +185m in the last quarter. With growth, inventories added +2.6% to the headline, business investment +2.1%, while consumer spending only added +0.1%.

The currency has underperformed on signs of slowing economic growth and reduced speculation that the BoC will resume increasing borrowing costs. The BoC is likely to maintain its neutral policy guidance at this morning’s rate meeting. The two main upside risks to inflation cited at the April meeting, commodity prices and strength in household spending, have both moderated recently. With the lagged effects of the CAD’s strengthening beginning to show up in the bank’s measure of financial conditions index, there is little reason for a more hawkish posture from Governor Carney. The currency will again be subjected to the pull of either risk or risk aversion trading strategies until we get to see NFP data this Friday (0.9715).

Australian data was on the weaker side of expectations earlier this morning, allowing the AUD to underperforming its closest trading partner the NZD. The current account deficit widened to AUD10.5b in the first quarter, driven by a -2.4% fall in net-exports. Analysts note that this reading points to a possible negative GDP print this evening. It has been clearly highlighted that that the fall in export volume in first quarter, especially of coal, was largely due to production disruptions from the Queensland’s floods. Other data showed that private sector credit was flat on the month, driven by still weak demand for personal and business credit, while building approvals fell -1.3%, m/m in April, following a downwardly revised +8.6% rise in March.

The market does not seem to down beaten by the data releases, especially after the RBA had signaled recently in the Statement of Monetary Policy that an anticipated fall in the first quarter growth is likely to be temporary and forecasts a strong rebound to +4.25% in the fourth quarter. Traders have reduced some of their bets on the amount of interest-rate increases by the RBA over the next 12-months to 22 basis points from 25 last week.

Providing support for the currency is the belief that the local dollar is also gaining stature as a global reserve currency, similar in nature to that of the CAD. Aussie yields are still the highest in the G10 and always look attractive. The expected mix of trade surpluses and rising capital inflows should provide support for the currency on these much deeper pullbacks for the time being (1.0679).

Crude is higher in the O/N session ($101.84 +1.25c). It’s not surprising to see commodities temporarily stall after the US growth numbers last week. However, some investors expect the commodity to be supported on these pull backs as speculation that fuel demand will increase with the start of the US summer driving season. Mind you, Friday’s NFP numbers will also be able to dictate the short term price direction.

Last week’s weekly crude supplies rose +616k barrels to +370.9m. Stockpiles were forecast to decrease by -1.5m barrels. A gentle surprise was gas inventories rising +3.79m barrels to +209.7m, above forecasts for a +300k build. The EIA data showed that gas demand fell over the last month by -2.1%, on average, versus the same period of last year. Distillate stocks fell -2.04m barrels to +141.1m barrels, well below projections for a +100k build. Refinery utilization rose +3.1% to 86.3%, much more than the +0.5% increase investors had expected.

Technically, the report could be seen as overall bullish because of the distillate number. However, the oil demand-supply situation is relaxed, and there’s no danger of any shortage. In theory, lower global interest rates should help the commodity which competes with yield-bearing assets for investors’ cash.

Gold prices are holding steady, supported by the ongoing debt crisis in the euro-zone boosting demand for the metal as an alternative asset. Short term immediate pressure can be seen coming from the Shanghai bourse, which plans to temporarily increase margins on commodity futures to dampen a surge in volumes. Apart from that, investors continue to buy bullion to protect themselves against economic and currency uncertainties.

Strong buying recommendations from Goldman and Morgan Stanley have also been good enough reason to drag the commodity up from last week’s lows. The yellow metal is being used as a store-of-value and trades like a currency.

The metals bull-run is far from over with speculators continuing to look to buy gold on deeper pullbacks. Interestingly, the sale of gold coins this month remains on track for the best month in a year amid the worst commodities rout in three-years, which would suggest that bullion’s longest ‘bull market’ still has room to run ($1,540 +$2.40c).

The Nikkei closed at 9,93 up+189. The DAX index in Europe was at 7,297 up+136; the FTSE (UK) currently is 5,999 up+60. The early call for the open of key US indices is higher. The US 10-year backed up 3bp yesterday (3.09%) and is little changed in the O/N session.

The FI asset class has been able to push yields to a new yearly record low for this year, after a disappointing US GDP and weekly claims report last week encouraged investors to seek shelter in a safer asset class. It seems that global investors have turned increasingly bullish on US paper, as weakening economic data points to sluggish growth, tepid inflation and the likelihood monetary tightening is still a long way off. All of last week’s $99b US issue’s were strongly received, despite yields piggy backing yearly lows. Until the market begins to get some bad news on inflation, investors should remain bulled up!

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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