Yesterday's ugly sell-off at the end of the US session yields to an almost equally strong rally this morning as the market can't seem to figure out what it wants to do here. Bonds sold off again in a mirror image of the action in equities ahead of the large auction of US 10-year notes.
UK Inflation report rains on GBP parade
GBP bulls were in the driver's seat into today on the news of the new Conservative/LibDem coalition and Cameron's promises to get tough on the UK budget. But the BoE Quarterly Inflation report cooled the rally in sterling as the bank sees inflation falling to below target in 2011 despite above-target readings this year. But the real zinger for the pound was King's refusal to rule out additional asset purchases. This and the BoE's complacent view on inflation suggests that the BoE will be happy to not budge on rates for as long as possible.
GBP bulls were in the driver's seat into today on the news of the new Conservative/LibDem coalition and Cameron's promises to get tough on the UK budget. But the BoE Quarterly Inflation report cooled the rally in sterling as the bank sees inflation falling to below target in 2011 despite above-target readings this year. But the real zinger for the pound was King's refusal to rule out additional asset purchases. This and the BoE's complacent view on inflation suggests that the BoE will be happy to not budge on rates for as long as possible.
The March 2011 short sterling STIR jumped about 10 points on this news and the report obviously dragged on the pound, with GBPUSD once again rejected at 1.5000, while EURGBP bounced rather strongly from attempts at recent lows. It's hard to build a bullish case from a rate perspective just yet. Any pound rally in the near term will need to see a lower perceived default risk on UK sovereign debt - which is showing some promise, though the government has a lot to prove in the coming months. Another question here is how the bank will react when/if it's inflation forecasts are far too low. Central banks are consistently horrible at projecting economic trends - as are most dismalists. This BoE report is not good for GBP, which may lose steam here in the near term.
Australian rates and data
The Australian home loans data showed another drop in home lending activity and we note in our models that loan activity has been consistently falling off for many months now while prices have been rising to new bubbly highs in the real estate market. The number of "owner occupied" loans has fallen to the lowest level since early 2001 as speculation runs rampant. Could a correction lie just around the corner? We think the market has priced the Australia dollar very wrong here, though it may take some time for a negative AUD story to develop. AUDUSD put options anyone?
The Australian home loans data showed another drop in home lending activity and we note in our models that loan activity has been consistently falling off for many months now while prices have been rising to new bubbly highs in the real estate market. The number of "owner occupied" loans has fallen to the lowest level since early 2001 as speculation runs rampant. Could a correction lie just around the corner? We think the market has priced the Australia dollar very wrong here, though it may take some time for a negative AUD story to develop. AUDUSD put options anyone?
Chart: EURAUD and ECB/RBA rate expectations
The spread of the ECB/RBA rate expectations bottomed recently while EURAUD kept chugging lower - is there ever going to be room for a reversal in this pair? The answer to that likely depends on the market moving RBA expectations lower, which would probably require a further consolidation lower in the risk trades here.
The spread of the ECB/RBA rate expectations bottomed recently while EURAUD kept chugging lower - is there ever going to be room for a reversal in this pair? The answer to that likely depends on the market moving RBA expectations lower, which would probably require a further consolidation lower in the risk trades here.
North American Data
Today's data from Canada showed a new decline in the Canadian merchandise trade level to barely above 0 after Canada posted a deficit for this number for the first time in a generation in late 2008. The strong loonie is not helping out here as the country risks becoming a petro/metallo-state if the current trends persist. Meanwhile, a housing bubble is raging in Canada as well as in Australia. We'll be talking more about the housing hotspots in the world in our forthcoming FX Monthly. Stay tuned.
Today's data from Canada showed a new decline in the Canadian merchandise trade level to barely above 0 after Canada posted a deficit for this number for the first time in a generation in late 2008. The strong loonie is not helping out here as the country risks becoming a petro/metallo-state if the current trends persist. Meanwhile, a housing bubble is raging in Canada as well as in Australia. We'll be talking more about the housing hotspots in the world in our forthcoming FX Monthly. Stay tuned.
Meanwhile, the US Trade Balance was no great surprise, and showed a slightly larger overall deficit with a small contraction in the ex Petroleum number, suggesting that consumption-led imports were not particularly strong for the month. Since the ex-petroleum trade deficit bottomed (peaked?) at less then -10B in mid-2009, it has only re-widened to about -15B, or about 1% of GDP.
Pricing the yen.
The JPY is looking weaker than it should from a rate perspective, and as we discussed recently, this may be due to the focus on sovereign default risks. CDS prices on Japanese sovereign debt rose much more sharply than those for the US during the recent cycle of fear on this issue. Over the last few days, sovereign debt concerns have faded somewhat, and will need to fade especially sharply for Japan if we are to see a more stable JPY rally. (In other words, for JPY to rally, we would need to see risk aversion that is not intertwined with sovereign debt worries, but perhaps one based on more pessimistic estimates for world growth.)
The JPY is looking weaker than it should from a rate perspective, and as we discussed recently, this may be due to the focus on sovereign default risks. CDS prices on Japanese sovereign debt rose much more sharply than those for the US during the recent cycle of fear on this issue. Over the last few days, sovereign debt concerns have faded somewhat, and will need to fade especially sharply for Japan if we are to see a more stable JPY rally. (In other words, for JPY to rally, we would need to see risk aversion that is not intertwined with sovereign debt worries, but perhaps one based on more pessimistic estimates for world growth.)
Looking ahead
RIsk is looking bubbly ahead of the US open - can we follow through yesterday's highs, which are key technical resistance? That and the results of the $24 billion US 10-year treasury auction are likely to dominate the market's attention today. On a worrying note for the risk bulls out there, the more activist US market watchdogs seem to be moving into crackdown mode, as we note the new story out about an investigation into Morgan Stanley mortgage derivative deals. Watch financial stocks (the XLF is a good benchmark as an indicator) in today's trading for general risk sentiment.
RIsk is looking bubbly ahead of the US open - can we follow through yesterday's highs, which are key technical resistance? That and the results of the $24 billion US 10-year treasury auction are likely to dominate the market's attention today. On a worrying note for the risk bulls out there, the more activist US market watchdogs seem to be moving into crackdown mode, as we note the new story out about an investigation into Morgan Stanley mortgage derivative deals. Watch financial stocks (the XLF is a good benchmark as an indicator) in today's trading for general risk sentiment.
On the Chinese real estate bubble-watch, we note a story out from Bloomberg showing that a Hong Kong auction of undeveloped land fetched a third less demand than expected as speculators and developers there perhaps fear the increasingly heavy hand of the Chinese regime and its efforts to cool the overheating Chinese economy.
On the economic calendar, Aussie traders should look out for the important Australian employment report out tonight, together with an appearance by the RBA's Lowe. Tomorrow's calendar looks relatively light, with the UK Trade Balance on tap and the latest weekly jobless claims number out of the US.
Stay careful out there.
Economic Data Highlights
- US Weekly ABC Consumer Confidence out at -47 vs. -46 expected and -47 last week
- Australia Mar. Home Loan Approvals fell -3.4% MoM vs. -3.0% expected
- Germany Q1 GDP (first estimate) rose +0.2% QoQ and 1.7% YoY vs. 0.0%/1.2% expected, respectively
- Switzerland Apr. Producer and Import Prices rose +0.6% MoM and +0.8% YoY vs. +0.4%/+0.6% expected, respectively
- UK Apr. Jobless Claims Change out at -27.1k vs. -20k expected and -32.7k in Mar.
- UK Mar. Average Weekly Earnings ex Bonus rose 1.9% 3M/YoY vs. +2.0% expected and 1.7% in Feb.
- EuroZone Mar. Industrial Production rose 1.3% MoM and 6.9% YoY vs. 1.0%/6.5% expected, respectively
- EuroZone Q1 GDP (first estimate) rose 0.2% QoQ and 0.5% YoY vs. +0.1%/+0.5% expected, respectively
- Canada Mar. New Housing Price Index rose +0.3% MoM as expected
- Canada Mar. International Merchandise Trade out at +0.3B vs. +1.6B expected and 1.2B in Feb.
- US Mar. Trade Balance out at -$40.4B vs. -$40.5B expected and -$39.4B in Feb.
Upcoming Economic Calendar Highlights
- US Weekly DOE Crude Oil and Product Inventories (1430)
- US Fed's Lockhart to Speak (1630)
- US Fed's Bullard to Speak (1715)
- US Apr. Monthly Budget Statement (1800)
- New Zealand Apr. Business NZ PMI (2230)
- UK Apr. Nationwide Consumer Confidence (2301)
- Japan Mar. Current Account (2350)
- Australia RBA's Lowe to Speak (0100)
- Australia Apr. Employment Change/Unemployment Rate (0130)
No comments:
Post a Comment