Is the EUR in for a surprise today?

The EUR’s fall seems inevitable, and watching the currency’s movement is like watching paint dry. With the futures recording record shorts, this downward demise is surprisingly orderly. Now that we have broken last weeks lows and printed new 14-month levels for the currency, its incredible to think that the EU/IMF with their trillion dollar investment is losing the battle to keep they currency ‘afloat’. Paul Volcker, the former Fed chairman said that it was ‘difficult to have a common currency without a common government’. This currency union without a political union could become non-existent. Throwing all the cultural issues aside, is there enough political will amongst the Euro-zone members to establish a European fiscal policy? It’s difficult to see Germany giving more than their share of handouts to the ‘have not’s’ southern Euro economies. The weaker global bourses have reacted to the disappointing profit forecasts and a report of a widening investigation of banks’ mortgage-bond deals in the US. All this is only providing risk aversion support for the upward dollar trend. It’s Friday and a surprise or two would not go amiss!

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.

Ascension Thursday gave us little to chew on apart from the US weekly unemployment report where new claims managed to fall for the fourth-consecutive week (+444k vs. +448k). This is the longest winning streak in nearly three years. Digging deeper, there are some positives in the report, the four-week moving average managed to fall to +450.5k, a drop of -9k w/w. However, not so good was the continuing claims print, advancing +12k to 4.627m. The problem with the report is that initial claims remain consistently high. The market would feel more comfortable with claims at or below +400k, the benchmark for an economy to produce the job gains that we have witnessed in the last NFP report (+290k). With an unemployment rate currently at +9.9% it will take time to fall as new jobseekers exceed available positions.

The USD$ is higher against the EUR -0.06%, GBP -0.41%, CHF -0.17% and higher against JPY -0.01%. The commodity currencies are weaker this morning, CAD -0.36% and AUD -0.12%. The loonie remains in ‘no man’s land’, try to plan its assault on parity. Last night all commodity currencies lost ground as global bourses saw red again. Domestically, even with a weaker trade surplus print earlier this week (+0.3b vs. +1.2b) has had little negative effect on the currency. On a cross related basis the CAD continues to find strong buyers and has managed to print an 8-year high again vs. the EUR last night as investors seek surety in a currency that has strong fundamentals. Risk aversion trading strategies that historically require purchasing of the USD and selling of the loonie are somewhat being ignored. The dollar has been in demand vs. most of its other major trading partners and not against its largest. This week, the CAD retreated from a three-month low, after the EU/IMF accord announcement, as a record increase in ‘their’ employment last month has dealers pricing in a rate hike by the BOC next month. Technical analysts have noted that the greenback has wanted to grind higher for surety reasons despite the threat of Canadian interest rate hikes, but, the countries stronger fundamentals coupled with a ‘rapid’ gold market is bringing loonie buyers on dollar rallies back into the market. Loosening risk aversion will only promote the currency even more.

It’s not surprising with the doubt that the markets are experiencing with the EU/IMF accord that growth currencies have retreated from their initial euphoric high recorded earlier this week. Despite the AUD gaining some initial support earlier in the week from a stronger job’s report, the currency fell for a second consecutive day against the JPY on concerns that the deficit-cutting measures by EU will eventually inhibit global economic growth, and by default reduce demand for higher-yielding assets. Employment advanced for a second consecutive month (+33.7k vs. +22k), but managed to keep the unemployment rate steady at +5.4%. It’s noted that most of the jobs gains were in Queensland, which is the ‘source of much of the coal shipments to China’. For now European uncertainty is weighing on the respected currency (0.8930).

Crude is weaker in the O/N session ($73.18 down -122c). Oil continues to fall, dipping to its lowest level in three-months, as the robust dollar dampens investors’ demand for alternative investments. Wednesday’s inventory EIA report had already put pressure on crude. Stocks climbed for the 14th time in the last 4-months as refineries had various units lay idle. Supplies of crude increased +1.95m barrels to +362.5m vs. a forecasted climb of +1.6m. Inventories at Cushing increased +784k barrels to +37m (the highest level in 6-years). Not helping the cause, refineries operated at +88.4% of capacity, down -1.2%, w/w, the first decline in two months. On the flip side, gas inventories managed to fall, down -2.81m barrels to +222.1m. Analysts had expected an increase of +400k. This was certainly a bear report for the commodity. Of late, both the US economy and the dollars strength and not oil fundamentals have driven the market. The IEA has again cut its estimate of world oil demand this year by -220k to +86.4m barrels a day. According to the same organization, OPEC will need to pump +28.7m bpd to ‘balance global oil demand and supply this year’, that’s -400k barrels less than last month’s estimates. The market will now hone in on the $73 support level. Over the last 5-trading sessions the ‘black gold’ has managed to shave -14% of its value. Recent prices had been supported on ‘expectations that demand will climb as economies rebound’, however, the market will now rely on fundamentals and the oversupply of the commodity. Expect the market to continue to be better sellers on rallies.

Gold continues to outpace other asset classes and constantly record new record highs (USD, EUR, GBP, JPY, CHF) on concerns that the EU/IMF loan accord to bail out indebted nations in Europe may not be enough to contain the sovereign debt crisis. Yesterday’s mad surge to own the ‘yellow metal’ took a breather with dealers booking some of this week’s accumulated profits. Investors are speculating that the EU/IMF accord could ‘cement easier monetary policy’ and promote inflation. Europeans it seems want to be in the ‘currency of last resort’ and are using the commodity as their second reservable asset, supplementing their EUR denominated assets. Others have outright been liquidating their EUR holdings and buying gold ahead of a possible ‘dissolution of the monetary union’. With the chances of monetary tightening being postponed is positive for the ‘yellow metal’ as interest rates are an ‘opportunity costs for non-yielding assets’. Year-to-date, the yellow metal has appreciated +13% on European contagion fears, while the EUR has depreciated -12% fueling demand for the commodity as an alternative investment. The technical bulls believe that $1,400 is a possible one-year target. For now, the market is a better buyer on pull backs ($1,240).

The Nikkei closed at 10,462 down -158. The DAX index in Europe was at 6,208 down -44; the FTSE (UK) currently is 5,367 down -67. The early call for the open of key US indices is lower. The US 10-year backed up 1bp yesterday (3.55%) and eased 4bp in the O/N session (3.51%). The treasury market took down the third tranche of this week’s $78b supply of new product. Again dealers quite rightly cheapened the curve in anticipation. Yesterday’s $16b 30-year bond was well received (4.49%) and came with a solid direct bid (non-primary dealers etc) of 22% which was offset by a slightly below average indirect bid of 33%. The 1.7bp tail was better than the average for recent refunding auctions but slightly worse than the 6-auction average. The flight to quality remains with the FI market remaining better bid on pull backs. With a softer world equity market, investors require some yield in their portfolios.

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