The price action in the financial markets overnight suggests that the weekend has brought no relief to investors who are still extremely nervous about the sovereign debt crisis in Europe. During the Asian trading session, the euro plunged to a 4 year low against the U.S. dollar while the British pound fell to its lowest level since March 2009. However since then both currencies have risen from their lows with the euro even turning positive against the U.S. dollar. This has led many traders to wonder if the euro has reached a near term bottom. As we have seen through the IMM positioning data from the CFTC on Friday, the short euro trade has become extremely overcrowded. If there is a time for short euro traders to square their positions or their reduce exposure, it would be today ahead of tonight's EU Finance Ministers' meeting, where the market's response to the rescue package, Greece, Spain and Portugal's are expected to be discussed.
The euro also rallied after the ECB released details for their government bond purchase program. When they first announced their intention to buy government bonds, the euro fell because of the lack of specifics and the abundance of unanswered questions. This morning, the ECB said they have bought EU16.5 billion worth of bonds and provided details on their sterilization method. They expect to carry another liquidity absorption operation next week through one week term deposits.
Although the sovereign debt crisis in Europe will continue to overshadow economic data, it is worthwhile to mention the record amount of demand for U.S. dollars in March. According to the U.S. Treasury's data, foreign demand for long term U.S. assets rose by $140.5B, compared with $47.1B the previous month. Most of the demand for Treasuries came from the private sector as foreign central banks bought dollars at a far more modest rate. This suggests that private investors began to move money into the safety of U.S. dollars in March. Including a big drop in the net dollar denominated liabilities of banks, net flows into the U.S. dollar was $10.5 billion. The April and May data could be even stronger as central banks increase their pace of diversification out of euros. This morning, the euro came under pressure after Russia announced that the euro share of their reserves has fallen to 43.8% from 47.5% in 2008. We suspect that other central banks are dumping euros as well.
Meanwhile U.S. manufacturing data was less encouraging. In May, manufacturing activity in the NY region was the slowest since January as declines were seen in shipments, new orders and unfilled orders.