FX Update: Risk bulls pretending yesterday didn't happen.
The bulls are mounting a valiant charge after yesterday's swoon in risk appetite in pre-New York session trading, with AUDUSD retracing half and more of its losses and EURUSD poking its head back above 1.3200 resistance after breaking that level as support in yesterday's trading. But is the bulls' determination bravery or insanity?
EuroZone Contagion
A number of factors point to reason for caution here. The EuroZone contagion situation is white-hot: Greek 2-year yields have reached junk yields close to 18% after yesterday's downgrade of Greek debt to junk status. The simultaneous downgrade of Portuguese debt provided further fuel for contagion fears and spreads there are widening dangerously. Irish debt spreads have also taken off, with the 2-year trading close to 400 bps above the German Schatz today. Most worrying, Spanish spreads have begun to stir as well. And while the EuroZone might be able to deal with a Portuguese rescue situation (smaller problem than Greece), it won't be able to deal with a Spanish situation of any significant size, so Spain will need to move to reassure markets that it is shoring up its finances very quickly to avoid the hinges coming off the entire EuroZone project. Increasing the contagion risk - Spanish banks are the biggest holders of Portuguese debt.
A number of factors point to reason for caution here. The EuroZone contagion situation is white-hot: Greek 2-year yields have reached junk yields close to 18% after yesterday's downgrade of Greek debt to junk status. The simultaneous downgrade of Portuguese debt provided further fuel for contagion fears and spreads there are widening dangerously. Irish debt spreads have also taken off, with the 2-year trading close to 400 bps above the German Schatz today. Most worrying, Spanish spreads have begun to stir as well. And while the EuroZone might be able to deal with a Portuguese rescue situation (smaller problem than Greece), it won't be able to deal with a Spanish situation of any significant size, so Spain will need to move to reassure markets that it is shoring up its finances very quickly to avoid the hinges coming off the entire EuroZone project. Increasing the contagion risk - Spanish banks are the biggest holders of Portuguese debt.
Fortunately for Spain, they are starting at a much better place in terms of total public debt to the size of the economy - though their shorter term fiscal shortfalls are of similar magnitude relative to GDP. Trichet is on a mission to Berlin to talk with German authorities to get some kind of rescue package moving as German politicians are handicapped by an outraged populace during election season. Another provocative piece from the Telegraph's Evans-Pritchard discussed the potential for an ECB "nuclear option". Worth a read. S&P has forecast that bond investors in Greece shouldn't expect to recover more than 50 cents on the Euro for their sovereign debt holdings.
Chart: EuroZone debt spreads
Contagion is upon us. The most important spread to watch now is the spread for Spain.
Contagion is upon us. The most important spread to watch now is the spread for Spain.
Risk spike - but already fading fast?
A move like yesterday saw all risk metrics rising in the wrong direction for the bulls, besides the VIX spiking higher to the highest level since mid February, FX volatility made a similar leap higher for obvious reasons. Junk bond spreads widened and wiped out a month and more of tightening, as did emerging market spreads. Commodities took a dislike to the situation as well, with copper suddenly falling off its pedestal, and oil making a try at recent lows. The copper correction saw Australia BHP Billiton gap lower, drawing more oxygen from the AUD fundamentals.
A move like yesterday saw all risk metrics rising in the wrong direction for the bulls, besides the VIX spiking higher to the highest level since mid February, FX volatility made a similar leap higher for obvious reasons. Junk bond spreads widened and wiped out a month and more of tightening, as did emerging market spreads. Commodities took a dislike to the situation as well, with copper suddenly falling off its pedestal, and oil making a try at recent lows. The copper correction saw Australia BHP Billiton gap lower, drawing more oxygen from the AUD fundamentals.
Still, as we are writing this, Bunds are undergoing a very sharp correction lower, echoed by US treasuries, and this is seeing the higher yielding currencies make a valiant attempt at pretending yesterday never happened. One reason bunds might be falling is that traders who have been engaging in a spread trade with other European debt, might be thinking that it is a good idea to reduce exposure to Euro debt in general, as Bund yields almost touched an all-time low yesterday. The retreat in US bonds has USDJPY pushing back at 94.00 after trading below 93.00 yesterday.
Chart: NZDJPY
NZDJPY has been one of the most volatile pairs as yesterday's risk hiccup was the pair two figures lower. Today, the pair is posting a massive reversal higher - driven more by the reversal in bond yields, it seems, rather than other risk indicators, which have failed to catch up with the bond market just yet. NZD traders should keep an eye on the RBNZ tonight and the Trade data also set for release later.
NZDJPY has been one of the most volatile pairs as yesterday's risk hiccup was the pair two figures lower. Today, the pair is posting a massive reversal higher - driven more by the reversal in bond yields, it seems, rather than other risk indicators, which have failed to catch up with the bond market just yet. NZD traders should keep an eye on the RBNZ tonight and the Trade data also set for release later.
Stumbling sterling
Sterling is stumbling with every sign of the Liberal Democrats advancing in the polls and the prospects of a hung parliament. The fact that sterling can't advance here while the Euro looks in dire straits speaks to the weakness of the currency and it looks like we have established a trading range here before the election that is fast approaching on May 6, a week from tomorrow. The short term resistance is just above 0.8700 in EURGBP and around 1.5300 for the short term in GBPUSD.
Sterling is stumbling with every sign of the Liberal Democrats advancing in the polls and the prospects of a hung parliament. The fact that sterling can't advance here while the Euro looks in dire straits speaks to the weakness of the currency and it looks like we have established a trading range here before the election that is fast approaching on May 6, a week from tomorrow. The short term resistance is just above 0.8700 in EURGBP and around 1.5300 for the short term in GBPUSD.
FOMC preview
Markets have enough to react to without the FOMC today, and we wonder whether it will have much of an impact. With super low inflation data and very slow improvement/stagnation in employment numbers, the Fed is not likely in any kind of mood to rock the boat here and our expectation is for a virtually unchanged statement, that might be celebrated briefly for its implications on continued easy liquidity and the speculation that this drives, but then the market will get back down to sorting through the implications of the EuroZone situation and worries over the financial reform debate. It's either that scenario, or a scenario in which the new bears, and red-eared bulls who capitulated yesterday and are scrambling to re-establish their longs continue to bid up risk all day long, only to find more caution on the other side of the FOMC.
Markets have enough to react to without the FOMC today, and we wonder whether it will have much of an impact. With super low inflation data and very slow improvement/stagnation in employment numbers, the Fed is not likely in any kind of mood to rock the boat here and our expectation is for a virtually unchanged statement, that might be celebrated briefly for its implications on continued easy liquidity and the speculation that this drives, but then the market will get back down to sorting through the implications of the EuroZone situation and worries over the financial reform debate. It's either that scenario, or a scenario in which the new bears, and red-eared bulls who capitulated yesterday and are scrambling to re-establish their longs continue to bid up risk all day long, only to find more caution on the other side of the FOMC.
RBNZ preview
The RBNZ is up within a few hours of the Fed. No change is expected to the 2.50% rate, but the market is looking for guidance on when the first rate hike might take place, with the market looking for the July meeting as the most likely point for a move. Yesterday's action in NZD suggests traders need one eye or more on the general situation in risk as much as the meeting itself. One of the more interesting NZD crosses to watch of late is AUDNZD, which is attempting to establish a real downtrend again. The 1.2950 area is important resistance there, while 1.2800 is the current support. NZDUSD has been all over the map on the latest market events, but needs to close down through the 200-day moving average it has surfed along for weeks now to nourish any bearish hopes.
The RBNZ is up within a few hours of the Fed. No change is expected to the 2.50% rate, but the market is looking for guidance on when the first rate hike might take place, with the market looking for the July meeting as the most likely point for a move. Yesterday's action in NZD suggests traders need one eye or more on the general situation in risk as much as the meeting itself. One of the more interesting NZD crosses to watch of late is AUDNZD, which is attempting to establish a real downtrend again. The 1.2950 area is important resistance there, while 1.2800 is the current support. NZDUSD has been all over the map on the latest market events, but needs to close down through the 200-day moving average it has surfed along for weeks now to nourish any bearish hopes.
Looking ahead
Plenty to watch with this volatile market and two central bank meetings on tap later in the day. Later today, watch for the results of a $42 billion 5-year US treasury note auction after yields spiked lower yesterday. Tomorrow we have a 7-year auction.
Plenty to watch with this volatile market and two central bank meetings on tap later in the day. Later today, watch for the results of a $42 billion 5-year US treasury note auction after yields spiked lower yesterday. Tomorrow we have a 7-year auction.
Stay careful out there.
Economic Data Highlights
- US Weekly ABC Consumer Confidence out at -49 vs. -48 expected and -50 last week
- Japan Mar. Retail Trade rose +0.8% MoM and +4.7% YoY vs. -0.6/+3.6% expected, respectively
- Australia Q1 Consumer Prices rose +0.9% QoQ and +2.9% YoY vs. +0.8/+2.8% expected, respectively
- Australia Q1 Trimmed Mean CPI rose +0.8% QoQ and +3.0% YoY vs. +0.6/+2.9% expected, respectively
- New Zealand Apr. NBNZ Business Confidence rose to 49.5 vs. 42.5 in Mar.
- Sweden Mar. Unemployment Rate fell to 9.1% vs. 9.5% expected and 9.3% in Feb.
- Germany Apr. Consumer Price Index fell -0.1% MoM and rose 1.0% YoY vs. +0.2/+1.2% expected, respectively
- Canada Feb. House Price Index rose 9.9% YoY vs. +7.5% in Jan.
Upcoming Economic Calendar Highlights
- US Weekly DOE Crude Oil and Product Inventories (1430)
- US FOMC Rate Decision and Monetary Policy Statement (1815)
- New Zealand RBNZ Cash Rate decision (2100)
- New Zealand Mar. Trade Balance (2245)
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