Euro Posturing Begins

Thank Medley, market rumors of a Euro-positive research report have dragged and supports a higher EUR ahead of tomorrows rate announcement. It’s believed that the group indicated that the ECB is comfortable with a stronger currency and is not too concerned with the ongoing periphery sovereign debt crisis. Nor is the rest of the market its seems. It’s unfazed by Portugal’s EFSF EUR87b program, despite being the third Euro-zone country to succumb to the sovereign debt crisis after Ireland and Greece.

The market is looking for some clear indication of when the next ECB hike is coming. Recent inflation data has markets betting that Trichet’s communique could indicate July, however, a signal for June would show more urgency, justifying Trichet’s hawkish credentials and even more positive for the EUR. Can policy makers be moving too fast?

The US$ is weaker in the O/N trading session. Currently, it is lower against 11 of the 16 most actively traded currencies in a ‘subdued’ session.

Forex heatmap

US factory orders climbed for a fifth consecutive month in March (+3%) yesterday. A broad based increase in orders as well as rising prices for food and oil were factors behind the bigger than expected gain. Manufacturing is helping to carry the economy from the depth of this recessions low in 2009. However, rising energy costs are a concern for factories and raising the challenges for companies to turn a profit. Digging deeper, durable goods orders rose by +2.9%, while ex-transportation also climbed +2.6%. The report showed that March Factory shipments rallied +2.7%, while unfilled orders (a sign of future demand) rose +0.8%.

The USD is lower against the EUR +0.27%, GBP +0.09%, CHF +0.03% and higher against JPY -0.10%. The commodity currencies are stronger this morning, CAD +0.03% and AUD +0.21%.

PM Harper got his majority and the loonie finally found some support, not so much on Canadian political or fundamental reasons, but on the back of a market that has sent investors into classic safe heavens. The loonie has been underperforming against most of its major trading partners, except outright against the dollar. Similar to most other major currencies, the currency managed to print a new three-year high last week, on speculation that the Fed will trail the BoC in raising interest rates.

This week’s general election is a CAD-positive result, with the probability that the loonie could revisit its multi-decade low (0.9059 in 2007) if the dollar negative sentiment persists over the next few months. Investors are looking to own the currency on any dollar rallies (0.9520).

The Aussie dollar had been trading under pressure outright after the PBoC said in a report yesterday that taming inflation is its highest priority. Earlier this week the RBA were not as hawkish as feared when it came to rates, but hawkish nonetheless. As expected, they left their rate policy on hold (+4.75%). Their statement was hawkish compared to the April release, but certainly caught the rate’s market on the back foot, who had pushed yields higher going into the meeting in the wake of higher than expected first quarter inflation.

Governor Stevens’s communiqué ran a balanced mix of downplaying first quarter inflation due to the floods, noting strength in the labor market and a pickup in corporate credit growth but weakness in household credit. Policy makers replaced the ‘stance of monetary policy remained appropriate,’ with ‘in future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation’, another nugget for possible rate hikes. Why add this warning now if you think it might only apply in 2012?
On AUD pull backs sovereign names continue to covet the currency. The market is now pricing in a +52% chance that the RBA will raise its benchmark rate to +5% by October, down from +62% earlier in the week.

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 (1.0880).

Crude is weaker in the O/N session ($110.84 -0.21c). If anything, the news of bin Laden’s death has only increased the volatility in the crude market. Initial reaction was dollar supportive and black-stuff negative, however, his death does not alter the facts that have pushed the buck to a three-year low against most of its major trading partners and does not end the geopolitical concerns in MENA. The market has been leaning on the black-stuff’s prices ahead of this morning’s inventory report as dealers anticipate another build up of stocks.

Last weeks EIA report had inventories rising +6.16m barrels to +363.1m, the biggest one-week advance since July 2010. Crude imports rose +1.21m barrels to +9.23m. In contrast, gas inventories fell for the tenth consecutive week, -2.51m barrels to +205.59m, compared with expectations for a -1.1m drawdown. It’s worth noting that gas inventors fell in spite of domestic demand falling by -1.6% last month on a year over year basis. Finally, distillates (heating oil and diesel) dropped -1.81m barrels to +146.53m. Refinery utilization rose +0.2% to 82.7%. In reality, it looks like refiners have got to convert more of the oil into gas in the coming weeks.

The IEA said it maintains its 2011 global oil demand growth forecast but noted that the high oil prices are beginning to dent demand growth. OPEC have stated that there is ‘no shortage of oil anywhere in the world’ even after supply curtailments in MENA. It’s all about the dollar’s inverse relationship with commodities. The market is back to the drawing board until we can break this volatile intraday range.

Gold prices have been dragged lower by the liquidating of silver position after the CME hiked initial margin requirements for the third time in over a week. Silver prices have been able to surge to 31-year high in recent months. Fundamentals are now supporting some sort of correction. The uncertain macro-economic and political environment will continue to attract investors to gold, as does the continuing weakening of the dollar on the back of US policy makers being slow to tighten their monetary policy.

Gold, as a non-yielding asset, has a higher opportunity cost when interest rates rise. The precious metal has become the currency of choice with the dollar underperforming against its G10 trading partners. Investors have been trimming some of their risk exposure on the back of terrorist reprisal fears.

The metals bull-run is far from over with speculators continuing to look to buy the commodity on dips. Any price pullbacks are viewed as favorable opportunity for investors to continue to diversify into safe-haven assets, as the combination of a weak dollar and higher US inflation expectations support demand for inflation hedges ($1,537 -$2.80c).

The Nikkei closed at 10,004 up+154. The DAX index in Europe was at 7,531 up+31; the FTSE (UK) currently is 6,070 down-12. The early call for the open of key US indices is lower. The US 10-year eased 2bp yesterday (3.26%) and is little changed in the O/N session.

Investors have pared riskier assets as they assess the potential affect of reprisals from bin Laden’s death. Also providing support this week is the Fed buying back product for their debt-buying program.

Yesterday, the Treasury announced that they have halved its original forecast for net issuance in the second quarter from $198b to $142b. They attributed the decline to higher receipts and lower outlays. It’s a necessity to slow its approach to the debt-ceiling. With the coupon issuance to raise nearly $360b, the decline in issuance will come from a further decline in the bill supply, which will obviously affect money market liquidity.      

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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