Financial Advisor

FX Closing Note: Risk pulls back ahead of long weekend

Market action
As we suspected might happen, risk decided to turn tail later in the day ahead of the 3-day weekend in the US. The lead story give credit for the decline was an earnings report from JPMorgan that showed it retail banking unit performing worse than expected, including a revenue shortfall. JPMorgan's CEO Dimon, who has become somewhat of a guru as his bank was one of the best performing houses through the 2008-09 crisis, was also very cautious in his outlook for coming quarters. In better news in the financial sector, Bank of America reported the lowest level of credit card delinquencies in over a year, though broader credit card delinquency measures are not showing an improving trend as B of A's improvements may have more to do with the hatchet man hired to take over the consumer finance division. JP Morgan is setting aside an extra $1.9 billion to cover consumer loan losses. To get an idea of the general profit taking mentality, Intel, yesterday's hero with its stellar earnings for Q1, fell some 3% on the day.

But there was little collateral damage from the contraction in risk evident in the North American  session. The JPY edged back towards the strong levels already established before the session, and the USD was a bit stronger, but commodity currencies took the news well and merely consolidated in orderly fashion. It's appears that the currency markets need a bit more fire and brimstone from the other markets to react with wider swings. FX volatility has been rapidly contracting since the first of the year.
Chart: EURUSD
The bellwether EURUSD was sharply lower on the day. It appears the 21-day moving average is an important one to determine whether the pair is in a bearish or bullish stance. Tactically, bearis still need to prove themselves with a close below this average, though we are already back into the previous range. Meanwhile, on a more strategic basis, the bears need to take the action below the almost-tested 200-day moving average to trigger a longer term bearish view on EURUSD.




Canada's FinMin Flaherty on the wires
Today, FinMin Flaherty said private spending has rebounded strongly in Canada and that he is watching the housing market carefully after existing home sales rose to a record level in December. The average price of existing homes rose 19% from a year before. That is an almost bubble-like increase. He almost shrugged his shoulders at the weak dollar, saying that "We always worry about fluctuations in the dollar that are volatile, but I think that the reality is that we're going to be faced with a relatively weak US dollar." This apparent lack of concern may be helping to keep the pressure on USDCAD, which remains surprisingly low (a modest bounce on the day) despite today's risk aversion and further pressure on the price of crude.

Looking ahead
To reiterated, US markets will be closed on Monday. Next week is a slow week on the US calendar, with PPI and Housing Starts on Wednesday and the Hilly Fed on Thursday the only highlights. The Bank of Canada meets to decide on rates next Tuesday and it will be interesting to hear what the bank has to say about the current strength of the loonie. The key for JPY crosses and whether USDJPY is ready to resume its rally ahead of the 90.00 level is the direction in interest rates after this week's successful bond auctions. And then we have endless earnings reports rolling in throughout the week.

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