JPY pushes back against selling onslaught after last week's collapse.US Treasury Auction this week.
MAJOR HEADLINES – PREVIOUS SESSION
- New Zealand QV House Prices rose 1.0% YoY vs. +0.2% in Oct.
- Australia Nov. AiG Performance of Construction Index out at 47.6 vs. 50.9 in Oct.
- Norway Oct. Industrial Production fell -4.9% YoY vs. -1.2% in Sep.
- Norway Oct. Industrial Product Manufacturing fell -5.3% YoY vs. -3.0% expected and -4.4% in Sep.
- Germany Oct. Factory Orders fell -8.5% YoY vs. -6.2% expected and -12.8% in Sep.
- Canada Oct. Building Permits rose +18.0% MoM vs. 1.0% expected
THEMES TO WATCH – UPCOMING SESSION
(All times GMT)
- US Fed’s Bernanke to Speak at Economic Club of Washington (1700)
- Australia Q1 Manpower Survey (1901)
- US Oct. Consumer Credit (2000)
- New Zealand Q3 Manufacturing Activity (2145)
- US Fed’s Dudley to Speak (2245)
- Japan Oct. Current Account Total (2350)
- Japan Nov. Bank Lending (2350)
- UK Nov. BRC Retail Sales Monitor (0001)
- Australia Nov. NAB Business Conditions (0030)
- Australia Q3 Current Account Balance (0030)
- Japan Oct. Leading Index (0500)
Market Comments:
With today's follow up move stronger for the greenback, many are mulling the prospect of the end of the old knee-jerk correlation of the USD with risk appetite and whether we should be looking for a new paradigm in FX. It is far too early to tell, but certainly, the shocking improvement in the US employment data has been in important stress test here in the short term. For the USD to continue stronger here without the support of risk aversion, we would likely nee to see the following factors come into play:
- Continued strong improvement in US data. This almost without saying and this development is very much up in the air after the very weak ISM non-manufacturing, which weighs far more heavily in assessing the health of the US economy than does the jobs report, in our view.
- Signs of a stronger monetary response from the Fed. For the USD to break out of its status as an ideal funding currency for a carry trade, the Fed needs to show stronger signs of gearing up for a decisive exit strategy. This is certainly nowhere in evidence, though the market has begun to price in quite a bit more tightening of policy over the next couple of years than it was just a week ago.
- Fiscal credibility. The recent news of the largest US banks who were TARP recipients scrambling to repay the TARP funds (Citigroup is the latest trying to do so) is a step in the right direction for fiscal credibility for the US, but the Obama administration and the Fed still have a very long way to indeed after the huge round of handouts and bailouts that have gone into creating this somewhat artificial recovery. Ironically, the interest payments on US debt are actually far smaller than they were a few years ago due to the extremely low interest rates, but if rates rise, so does the burden of interest payments.
As we can see above, the argument for a stronger USD without risk aversion requires a very strong US economy and a Fed that moves quickly on rates. It also requires that growth conditions elsewhere in such a scenario don't accelerate even more rapidly. This is all a bit of a tough sell for more than the short term, so we still prefer to see this as perhaps a market positioning adjustment within the overall weak USD trend. But at least now we have lined up the factors that would help us change our mind.
On the other side of the coin, a strong move in risk aversion would still seem to be the best bet for USD bulls, due to its implications for interest rate spreads and further hurt put on market positioning and the clear historical evidence that unwinding of risk appetite is a direct challenge to any secular carry trade.
JPY and US interest rates
The JPY pushed back a bit after its sharp - even panicky - move to the weak side on Friday as bonds recovered rather strongly today ahead of this week’s Treasury auctions, which include $40 billion of 3-year notes tomorrow, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday. The Wednesday and Thursday auctions are particularly interesting after the very sharp moves higher in rates – will investors swarm to snap up the treasuries at higher yields ore. The auctions are likely to help determine whether USDJPY finds support already in the 90.00 area or whether a larger throwback scenario unfolds. 89.07 is the weekly pivot for the pair. Regardless, the pressing question is where to buy, not whether.
The JPY pushed back a bit after its sharp - even panicky - move to the weak side on Friday as bonds recovered rather strongly today ahead of this week’s Treasury auctions, which include $40 billion of 3-year notes tomorrow, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year bonds on Thursday. The Wednesday and Thursday auctions are particularly interesting after the very sharp moves higher in rates – will investors swarm to snap up the treasuries at higher yields ore. The auctions are likely to help determine whether USDJPY finds support already in the 90.00 area or whether a larger throwback scenario unfolds. 89.07 is the weekly pivot for the pair. Regardless, the pressing question is where to buy, not whether.
Chart: USDCHF
USDCHF has seen an interesting reversal off last week’s lows, a reversal that confirmed divergent stochastic momentum and strongly rejected the recent attempt below parity. We point out USDCHF as opposed to EURUSD because for once, EURCHF seems to be on the move a bit here to the upside after trying at 1.5000, meaning that the USDCHF rally has been more powerful than the EURUSD sell-off. If the CHF weakness has been aided by the SNB, then it could prove very fleeting, but rate spreads certainly suggest there could be more fuel for the rally fire here.
USDCHF has seen an interesting reversal off last week’s lows, a reversal that confirmed divergent stochastic momentum and strongly rejected the recent attempt below parity. We point out USDCHF as opposed to EURUSD because for once, EURCHF seems to be on the move a bit here to the upside after trying at 1.5000, meaning that the USDCHF rally has been more powerful than the EURUSD sell-off. If the CHF weakness has been aided by the SNB, then it could prove very fleeting, but rate spreads certainly suggest there could be more fuel for the rally fire here.
Darling and banker bonuses
Headlines suggest that the UK’s Chancellor Darling is ready to get tough on banker bonuses, and this may have fed into a bit of pound weakness today. But if we delve into the details of Mr. Darling’s statements, there is little meat to the pound bearish implication of what he is saying – on the one hand supporting the idea of taxing bonuses, but also clearly indicating that he is not on a witch-hunt and that he may not even support industry-wide windfall taxes if they would hurt banks’ reserve position. Mr. Darling will supposedly unveil specific deficit reduction measures in a pre-budget statement after having promised dramatic measures to shore up the government’s fiscal credibility.
Looking ahead
Today’s US Consumer Credit data is worth watching. Since the great blowup of 2008, US consumers have tightened their purse strings like never before in the history of this data series. Again, we ask – whither the US recovery when consumers don’t want to spend and are hunkering down to pay off their debts and save for a more uncertain future? On the technical front, we watch the 1.4800/25 zone in EURUSD for the status of this strong move in the USD, with the assumption that we are in strong USD mode as long as we remain below that level.
Headlines suggest that the UK’s Chancellor Darling is ready to get tough on banker bonuses, and this may have fed into a bit of pound weakness today. But if we delve into the details of Mr. Darling’s statements, there is little meat to the pound bearish implication of what he is saying – on the one hand supporting the idea of taxing bonuses, but also clearly indicating that he is not on a witch-hunt and that he may not even support industry-wide windfall taxes if they would hurt banks’ reserve position. Mr. Darling will supposedly unveil specific deficit reduction measures in a pre-budget statement after having promised dramatic measures to shore up the government’s fiscal credibility.
Looking ahead
Today’s US Consumer Credit data is worth watching. Since the great blowup of 2008, US consumers have tightened their purse strings like never before in the history of this data series. Again, we ask – whither the US recovery when consumers don’t want to spend and are hunkering down to pay off their debts and save for a more uncertain future? On the technical front, we watch the 1.4800/25 zone in EURUSD for the status of this strong move in the USD, with the assumption that we are in strong USD mode as long as we remain below that level.
