The relatively strong close for the USD last week is so far finding little add-on excitement this week as we remain in a kind of technical limbo for now. We’ve got a series of US treasury auctions up this week that are particularly important in light of last week’s range break in US long yields.
Weak Australia Data
The Australian data overnight was weak, with the worst (and strongly recessionary) AiG construction survey since the summer of 2007 and a weaker than expected retail sales number. A number of sources reported very weak retail demand in the beginning of this year as well. The market will likely try to write off the poor construction data as a result of the recent floods, but the downtrend was well underway before this data point was released. In general, the overall picture of a very weak non-mining Australia economy (actually teetering into recession?) remains in place. And the market is only able to ignore negative developments due to a slavish focus on commodity prices and risk appetite. There was no real change to the forward view on RBA rates on the back of this data, as the market is pricing in about 40 bps of further tightening from the bank in the year ahead. In the currency market, the fallout from the negative reports was so far very limited as of this writing as US equity market futures pushed to a new high and copper price also pushed to record highs.
The Australian data overnight was weak, with the worst (and strongly recessionary) AiG construction survey since the summer of 2007 and a weaker than expected retail sales number. A number of sources reported very weak retail demand in the beginning of this year as well. The market will likely try to write off the poor construction data as a result of the recent floods, but the downtrend was well underway before this data point was released. In general, the overall picture of a very weak non-mining Australia economy (actually teetering into recession?) remains in place. And the market is only able to ignore negative developments due to a slavish focus on commodity prices and risk appetite. There was no real change to the forward view on RBA rates on the back of this data, as the market is pricing in about 40 bps of further tightening from the bank in the year ahead. In the currency market, the fallout from the negative reports was so far very limited as of this writing as US equity market futures pushed to a new high and copper price also pushed to record highs.
Chart: GBPUSD
The GBPUSD chart is fairly typical of USD pair this week, as it is trading in a critical range and looks at whether it is time for the USD to make a stronger stand or dip to new long term lows. In cable’s case, a move and close back below the 1.6000-1.6060 area sets up the idea that the USD has a chance
The GBPUSD chart is fairly typical of USD pair this week, as it is trading in a critical range and looks at whether it is time for the USD to make a stronger stand or dip to new long term lows. In cable’s case, a move and close back below the 1.6000-1.6060 area sets up the idea that the USD has a chance
of a further recover here.
Odds and ends
Germany factory orders were very weak in December, offering further evidence that the strong recovery in the German export machine may be decelerating, though it Is still rather early days yet and the data series is very volatile.
Germany factory orders were very weak in December, offering further evidence that the strong recovery in the German export machine may be decelerating, though it Is still rather early days yet and the data series is very volatile.
Canada building permits were out at +2.4% month on month but down -5% year on year. Most of Canada is in a deep freeze at this time of year, but building permits don’t need good weather to be issued, and it will be interesting to see whether new rules on the government backing of mortgages will see a sharper slowdown in this figure in the months ahead., which should lead the housing starts data.
Looking ahead
The US dollar attempted to post a bit of a comeback last week after relatively strong data has bolstered the view that the US recovery has strengthened recently, adding to forward expectation of a Fed exit strategy post-QE2 and the highest expectations for rate hikes within the next 12 months since last summer. But it appears the more dominant theme for the markets is the same old USD/risk correlation that has been its obsession for so long now. As long as risk appetite remains on the up and up, the USD has a hard time maintaining a convincing rally stance. The only issue that could trump this relationship is the potential (unknown but noise levels increasing) for a new version of the Homeland Investment Act that last boosted the US currency back in 2005, when hundreds of billions of dollars of foreign profits were repatriated. Let’s keep an eye out for that one.
The US dollar attempted to post a bit of a comeback last week after relatively strong data has bolstered the view that the US recovery has strengthened recently, adding to forward expectation of a Fed exit strategy post-QE2 and the highest expectations for rate hikes within the next 12 months since last summer. But it appears the more dominant theme for the markets is the same old USD/risk correlation that has been its obsession for so long now. As long as risk appetite remains on the up and up, the USD has a hard time maintaining a convincing rally stance. The only issue that could trump this relationship is the potential (unknown but noise levels increasing) for a new version of the Homeland Investment Act that last boosted the US currency back in 2005, when hundreds of billions of dollars of foreign profits were repatriated. Let’s keep an eye out for that one.
As for economic data this week, the economic calendar is rather quiet. In the US, the main focus points are Thursday’s initial claim data and Friday’s Dec. Trade Balance data. The Australian employment report on Thursday could be a key focus/pivot point for the Aussie’s new rally attempt. The Bank of England is scheduled to announce on Thursday, though the lack of accompanying statement largely makes it a non-event.
Perhaps most importantly, particularly in light of longer yields finally breaking out of their range in the US, we have the three days of treasury auctions this week in the US, starting tomorrow with an auction of 3-year debt and followed on Wednesday and Thursday with auctions of 10-year and 30-year debt, respectively. Speculation is increasing on what yield level would finally give the rally in risk some pause. If the new higher range in yields holds, it supports USDJPY’s move back above the critical 82.00 technical area.
Economic Data Highlights
- Australia Jan. Performance of Construction Index out at 40.2 vs. 43.8 in Dec.
- Australia Dec. Retail Sales out at +0.2% MoM and -0.3% QoQ ex Inflation vs. +0.5%/-0.3% expected, respectively and vs. +0.5% QoQ in Q3
- Norway Dec. Industrial Product Manufacturing out at -1.0% MoM and +2.2% YoY vs. +0.5%/+4.2% expected, respectively and vs. +3.5% YoY in Nov.
- Germany Dec. Factory Orders out at -3.4% MoM and +19.7% YoY vs. -1.5%/+21.3% expected, respectively and vs. +20.6% YoY in Nov.
- Canada Dec. Building Permits out at +2.4% MoM vs. +2.5% expected.
Upcoming Economic Calendar Highlights (all time GMT)
- US Dec. Consumer Credit (2000)
- New Zealand Jan. QV House Prices (2300)
- Japan Dec. Current Account Total (2350)
- UK Jan. BRC Retail Sales Monitor (0001)
- UK Jan. RICS House Price Balance (0001)
- Australia Jan. NAB Business Conditions/Confidence (0030)
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