USDJPY fell after a surprisingly weak Japanese GDP report, and the greenback is generally under pressure despite further signs of risk aversion. Is the USD rally over with?
Japan's growth in Q2 decelerated to a paltry +0.4% rate Annualized (compare with Germany's 2.2% QoQ). But on a nominal basis, Japan’s growth was actually negative du to a -1.8% YoY GDP deflator reading. You know things are bad when you are counting on deflation to bump growth into the positive category. Even more worrying for the country, the Japanese Yen has strengthened since then, further threatening the export-dependent economy. Officials were out again over the weekend jawboning again on the Japanese Yen, though the rhetoric at this point has been fairly underwhelming. The bond sell-off we mentioned on Friday promptly evaporated today on the Japanese growth news and a bit of ugly follow through on Friday's very ugly close for risk appetite, and this pushed the JPY back to stronger levels vs. the USD and elsewhere. Still, history shows us that when specs begin to get long JPY in large amounts, that any JPY rally is not likely to last much longer. The question now is whether we get a spike before a reversal in USDJPY or whether current levels are already offering value for JPY skeptics (count us among them, even if we don't trust valuation judgments in the shortest term).
US Data
The first of the major regional US manufacturing surveys - the Empire survey - was released today and was slightly lower than expected at 7.1, though its was also slightly stronger than last month's 5.08 reading. The positive news was the solid increase in the number of employees and a bounce back in the average workweek index. On the more negative side, New Orders dipped alarmingly into outright negative territory and prices received dropped further into negative territory. The other news of interest out so far today was the TIC flows data, which is usually more forensic than predictive (in this case, it helps to explain why the USD rally faded and partially reversed in Jun. as total flows were actually negative for the month).
The first of the major regional US manufacturing surveys - the Empire survey - was released today and was slightly lower than expected at 7.1, though its was also slightly stronger than last month's 5.08 reading. The positive news was the solid increase in the number of employees and a bounce back in the average workweek index. On the more negative side, New Orders dipped alarmingly into outright negative territory and prices received dropped further into negative territory. The other news of interest out so far today was the TIC flows data, which is usually more forensic than predictive (in this case, it helps to explain why the USD rally faded and partially reversed in Jun. as total flows were actually negative for the month).
Chart: USDJPY hourly chart
USDJPY failed to hold the new highs on Friday as bonds rallied strongly again to open this week. The 0.618 Fibo retracement around 85.40 is struggling just ahead of the US open and below that, the only real support is the recent low at 84.75, which was the lowest level the pair has traded since 1995, when it briefly touched 80.00. For that latter level to be reached once again, we will need a persistent further move in US interest rates lower and we will also need for Japanese officialdom to remain complacent to the market's moves.
USDJPY failed to hold the new highs on Friday as bonds rallied strongly again to open this week. The 0.618 Fibo retracement around 85.40 is struggling just ahead of the US open and below that, the only real support is the recent low at 84.75, which was the lowest level the pair has traded since 1995, when it briefly touched 80.00. For that latter level to be reached once again, we will need a persistent further move in US interest rates lower and we will also need for Japanese officialdom to remain complacent to the market's moves.
Looking ahead
On Friday, we discussed the ominous closes on the lows of the week - so far the market is trying to brush off this development and change directions, but what catalyst would offer a strong hope for the bulls? As well, the positioning reports from the CFTC released on Friday showed that spec positions are getting stretched once again in the short USD category, meaning that there may be little fuel to drive the greenback lower (though it appears that the USD direction continues to be slave to/part of the entire risk appetite equation). A caveat to the worry about the speculative positioning are the reports in the financial media (see this Bloomberg article for an example - - that China remains interested in diversifying away from US assets after the shift in direction by Bernanke over the last two Fed meetings (more like a halt in the momentum of a move toward exit strategies as the Fed's balance sheet will remain stable). The question is whether China and other are ignoring the potential for the relative risks in Europe and Japan to prove equal or greater to those in the US in the months ahead. The only benefactor/alternative to the G-3, in the meantime, is gold, which has marched higher yet again in today's trade. The anti-USD trade looks rather stretched, in our view.
On Friday, we discussed the ominous closes on the lows of the week - so far the market is trying to brush off this development and change directions, but what catalyst would offer a strong hope for the bulls? As well, the positioning reports from the CFTC released on Friday showed that spec positions are getting stretched once again in the short USD category, meaning that there may be little fuel to drive the greenback lower (though it appears that the USD direction continues to be slave to/part of the entire risk appetite equation). A caveat to the worry about the speculative positioning are the reports in the financial media (see this Bloomberg article for an example - - that China remains interested in diversifying away from US assets after the shift in direction by Bernanke over the last two Fed meetings (more like a halt in the momentum of a move toward exit strategies as the Fed's balance sheet will remain stable). The question is whether China and other are ignoring the potential for the relative risks in Europe and Japan to prove equal or greater to those in the US in the months ahead. The only benefactor/alternative to the G-3, in the meantime, is gold, which has marched higher yet again in today's trade. The anti-USD trade looks rather stretched, in our view.
It is tough to find any particularly compelling catalyst this week in the US economic calendar, though tomorrow's housing data (July building permits and housing starts) and Thursday's weekly initial jobless claims have perhaps the most potential for the week. The NAHB survey out shortly is possibly an even better indicator on the current momentum in housing, however, even if it may not receive the attention it deserves.
On the technical front, the risk barometer of the S&P500 looks like it wants to use the 55-day moving average as resistance (there was also a lot of noise over the weekend about an almost ridiculously exotic indicator called the Hindenburg Omen that sounds very impressive but is probably a case of data mining to find some weird combination that has often spelled doom in the past). In FX, a similar risk barometer might be the 200-day moving average in AUDUSD around 0.8960, which is under assault just as we are about to go to press here.
Be careful out there - judging from Friday's close and the market's intraday volatility, it would seem that the further volatility potential remains very high.
Economic Data Highlights
- UK Aug. Rightmove House Prices fell -1.7% MoM and rose +4.3% YoY vs. 3.7% YoY in Jul.
- Japan Q2 GDP out at +0.4% Annualized vs. +2.3% expected and 4.4% in Q1
- Australia Jul. New Motor Vehicle Sales out at -2.6% MoM and +11.6% YoY vs. +7.8% YoY in Jun.
- Norway Jul. Trade Balance out at 28.4B vs. 25.5B in Jun.
- EuroZone Jul. CPI out at -0.3% MoM vs. -0.4% expected
- EuroZone Jul. Core CPI out at 1.% YoY as expected and vs. +0.9% in Jun.
- US Aug. Empire Manufacturing out at 7.1 vs. 8 expected and 5.08 in Jul.
- US Jun. Net Long-term TIC Flows out at +$44.4B vs. +$45.7B expected and +$35.3B in May
- US Jun. Total Net TIC Flows out at -$6.7B vs. +$40B expected and +$17.1B in May
Upcoming Economic Calendar Highlights
- US Aug. NAHB Housing Market Index (1400)
- Australia RBA Meeting Minutes (0130)
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