The Euro: Best of a Bad Lot

By Dean Popplewell

European public holidays have done little to ease any of the turbulence over the last few days as we head into employment releases. Capital markets seems to be accepting that NFP will be bad, but, how bad?

Negative sentiments from Moody's has failed to stop the EUR's rally. Even the suggestion of incentives for debt rollovers is not being touted as a Greek default. On the other hand, a stronger Spanish bond auction this morning is deemed as being favorable for the currency.

With "no news" being "good news" the currency is on the march again, towards strong resistance at 1.45

The US$ is weaker in the O/N trading session. Currently, it is lower against 13 of the 16 most actively traded currencies in an "orderly' session.

There is no other way to describe it, yesterday's ADP was a shock to the system and has many rethinking their expectations for tomorrow's employment release. According to the private sector release, job growth has all but disappeared (+38k vs. +177k). The weakness was felt in all categories. Analysts do caution that the correlation between the private components of the payrolls report are often poorly correlated "on the first pass and only come together after multiple revisions to both surveys." Despite the heeded warning, it's a safe bet that tomorrow's employment release will be much weaker than last month's +244k print.

?Digging deeper, the services sector continued to drive the headline print, adding +48k to overall payrolls following a +141k advance in April, while the goods-producing sector lost -10k jobs in May after posting gains in six consecutive months. Employment in manufacturing happened to decline by -9k, the first loss in eight-months.

A nasty U.S. ISM number followed the soft ADP release. The manufacturing sector slowed sharply last month (53.5 vs. 60.4) while price pressures lessened. It's just another economic release that follows a string of equally poor May reports. Digging deeper, the sub indexes were mixed. New orders plunged to 51 last month from a stellar 61.7 in April, while the production index fell to 51 from 63.8. It was not a surprise to see the factory employment index decline, falling to 58.2 from 62.7. Even the price pressures softened, easing to 76.5 from 85.5. Theses reports are only encouraging the dollar bears. ?

The dollar is lower against the EUR +0.59%, GBP +0.23%, JPY +0.02% and higher against CHF -0.26%. The commodity currencies are mixed this morning, CAD -0.03% and AUD +0.31%.

Weaker U.S. data is putting its largest trading partner's currency under pressure again, temporarily at lest. The Canadian bulls who read the BoC's communiqué as being hawkish should be happy that they are getting better levels to own the currency.

Earlier this week, as expected, the BoC kept their key interest rate unchanged (+1%) and said they will raise it "eventually" as the economy recovers. Governor Carney stated that "to the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn." Policymakers indicated that the recovery is "proceeding largely as expected" and that any rate increases would be "consistent with achieving the +2% inflation target."

The market has interpreted Carney's communiqué as being more hawkish than expected, particularly the language shift in the ending policy guidance. They have inserted the new word "some" rate hikes. Inflation will move towards the BoC +2% targets by the middle of next year despite the growth of the current CPI exceed +3% "in the short term," which has been driven by temporary factors such as higher taxes and food and energy costs.

The loonie is being subjected to the pull of either risk or risk aversion trading strategies until we get to see NFP data tomorrow (0.9775).

Aussie long positions after some hawkish data earlier this week have been sucking wind. Last nights economic releases has eaten into some of their losses. However, Moody's downgrading of a Greek default has hurt regional bourses and by default this higher yielding currency. The AUD happened to initially rally on a stronger than expected +1.1%, m/m, rise in Australian retail sales. Other data revealed that the trade surplus was largely flat at +$1.6b in April, driven by a +12%, m/m, rise in capital imports, which would suggest continued strong investment growth. While imports of consumption goods fell, strong April retail sales and income growth in the first quarter suggest this will likely rebound as companies replenish their inventories.

The market does not seem too 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 lower in the O/N session ($99.80 -0.49c). Oil price traction did not last that long. Crude has dropped after data yesterday showed that U.S. companies added fewer jobs than forecast in May as manufacturing growth slowed, booting concern that fuel demand growth will decline. Earlier this week, the commodity rose to a three week high after Juncker signaled more aid for Greece will be announced this month.

Today we get the holiday delayed weekly supply report. Last week's EIA release showed that 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 rallied to a four-week high yesterday, supported by the ongoing debt crisis in the euro-zone boosting demand for the metal as an alternative asset. The weaker dollar sentiment is also creating a positive metal scenario. With this economic soft patch the Fed is not going to be able to raise interest rates anytime soon. That's going to be a dollar negative and gold positive.

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 ($1,543 +$0.00c).

The Nikkei closed at 9,555 down-164. The DAX index in Europe was at 7,131 down-86; the FTSE (U.K.) currently is 5,876 down-51. The early call for the open of key US indices is lower. The U.S. 10-year eased 10bp yesterday (2.95%) and is little changed in the O/N session.

US 10's trading sub +3% has many wondering is Q3 around the corner. Yields seem to want to print new yearly lows daily. Yesterday, with US companies adding fewer private jobs last month and manufacturing expanding at its slowest pace in more than a year continues to have US product in demand ahead of tomorrows NFP release. It's worth noting that 10-year yields dropped 23bp last month and seem to be in a "look out below" vacuum. The danger for investors wanting product here is that the returns are low relative to expected inflation. However, until the market begins to get some bad news on inflation, investors should remain bulled up.