With equity markets storming back, strong metals prices and a renewed focus on QE3 potential, AUDUSD has had a look at its 28-year high from the last trading day of 2010 above 1.0250. Is there more gas in the tank for the rally or is it overdone? Also - Euro continues to weigh perils of Portugal versus the vigilane of Trichet as the EURUSD tug of war changes direction twice daily it seems.
Euro braggadocio – second thoughts?
The snapback rally in Euro from yesterday is having second thoughts today as the implications of the Portuguese downgrade are chewed over a bit more thoroughly. After the S&P ratings agency downgraded Portuguese debt from A- to BBB, LCH Clearnet, a major clearing house, said that Portuguese bonds would no longer be eligible for delivery. This effectively “eliminates international trading in Portugal’s debt” according to an FTalphaville article. This has rubbed EUR sentiment the wrong way late yesterday and into today, though on the ECB expectations front, we see nary a ripple of fear in expectations for the ever-vigilant Mr. Trichet’s intentions, as forward expectations are still at the high end of the recent range, around 120 bps for the next 12 months.
The snapback rally in Euro from yesterday is having second thoughts today as the implications of the Portuguese downgrade are chewed over a bit more thoroughly. After the S&P ratings agency downgraded Portuguese debt from A- to BBB, LCH Clearnet, a major clearing house, said that Portuguese bonds would no longer be eligible for delivery. This effectively “eliminates international trading in Portugal’s debt” according to an FTalphaville article. This has rubbed EUR sentiment the wrong way late yesterday and into today, though on the ECB expectations front, we see nary a ripple of fear in expectations for the ever-vigilant Mr. Trichet’s intentions, as forward expectations are still at the high end of the recent range, around 120 bps for the next 12 months.
Soaring AUD to have wings clipped or soar higher?
The AUDUSD came within a couple of pips of its highest level since early 1982 after a remarkable 6-day run after its post-Japanese tsunami low. The Aussie is generally sharply higher across the board – notching massive gains versus even the Canadian dollar and European currencies as well. While we understand the impulse to buy Aussie with such a strong equity market recovery and particularly in light of the metals rally, we wonder if the relative outperformance of the Aussie is overdone. Testing the waters in the likes of AUDCAD might be an interesting way for some to express an Aussie-negative view that doesn’t involve the greenback.
The AUDUSD came within a couple of pips of its highest level since early 1982 after a remarkable 6-day run after its post-Japanese tsunami low. The Aussie is generally sharply higher across the board – notching massive gains versus even the Canadian dollar and European currencies as well. While we understand the impulse to buy Aussie with such a strong equity market recovery and particularly in light of the metals rally, we wonder if the relative outperformance of the Aussie is overdone. Testing the waters in the likes of AUDCAD might be an interesting way for some to express an Aussie-negative view that doesn’t involve the greenback.
Chart: AUDUSD
AUDUSD on a 6-day sprint higher – a bit of caution at least before trying higher or will the pair do as it has in the past and simply refuse to push consistently above the 1.0200+ area? We recall back in 2009-10, when it took the pair the better part of a year to fully take out the 0.9300/0.9400 area after initial achieving that objective, and back in 2004, the AUDUSD touched 0.80, only to spend a bit over three years.
AUDUSD on a 6-day sprint higher – a bit of caution at least before trying higher or will the pair do as it has in the past and simply refuse to push consistently above the 1.0200+ area? We recall back in 2009-10, when it took the pair the better part of a year to fully take out the 0.9300/0.9400 area after initial achieving that objective, and back in 2004, the AUDUSD touched 0.80, only to spend a bit over three years.
Chart: AUDCAD
AUDCAD is an interesting way to look at the relative risks among the commodity currencies, though Aussie remains a more “pure” commodity currency than its North American counterpart. It is also an interesting way to express a view in energy prices versus other commodity prices. The risk for CAD is that a weak US drags the currency down, while the risk for Aussie is exposure to a potentially struggling China. From a longer term valuation standpoint, CAD looks relatively cheap. (It also looks relatively cheap in recent interest rate spread comparisons, though the market doesn’t seem to be focusing very intently on these at the moment.)
AUDCAD is an interesting way to look at the relative risks among the commodity currencies, though Aussie remains a more “pure” commodity currency than its North American counterpart. It is also an interesting way to express a view in energy prices versus other commodity prices. The risk for CAD is that a weak US drags the currency down, while the risk for Aussie is exposure to a potentially struggling China. From a longer term valuation standpoint, CAD looks relatively cheap. (It also looks relatively cheap in recent interest rate spread comparisons, though the market doesn’t seem to be focusing very intently on these at the moment.)
Odds and ends
The Swiss franc dropped sharply overnight, as USDCHF set a new 7-day high and EURCHF burst through local resistance and the 55-day moving average. The CHF seems to have an odd premium built in considering the environment of rising rates and higher risk appetite. Is CHF downside a further risk here in the short term?
The Swiss franc dropped sharply overnight, as USDCHF set a new 7-day high and EURCHF burst through local resistance and the 55-day moving average. The CHF seems to have an odd premium built in considering the environment of rising rates and higher risk appetite. Is CHF downside a further risk here in the short term?
The RBNZ’s Bollard suggested that the Christchurch rebuilding could add 2.5% to GDP growth next year and that there may be “some challenges managing the bottlenecks around it [earthquake reconstruction]” and New Zealand short rates were a bit higher again as the NZD found some further support in the crosses – even against the Aussie. Have we seen the bottom in NZD from the earthquake effect?
The German March IFO beat expectations and only barely managed to come in below the February number, though the drop in expectations was the reason for the slight fall in the overal index, while the current assessment actually rose to a new high for the cycle. This is a testament to the strength of the German economy for the moment.
Looking ahead
The next few trading days will help determine whether 1.40 or 1.4275 will break in EURUSD, though we have a “no expectations” EU summit to look forward to here. And the next several trading days could be very cyclically important considering we have the end of the quarter approaching (some window-dressing/benchmark chasing going on in equities at the moment?) and the end of the financial year for Japan. Meanwhile the USD is teetering near multi-year lows. And the big question shortly after the turn of the quarter will be the degree to which incredibly input costs increases have squeezed corporate margins as Q1 earnings reports begin rolling out. So it appears that the risk of a major transition period might be under way during the next 2-3 weeks. Stay tuned.
The next few trading days will help determine whether 1.40 or 1.4275 will break in EURUSD, though we have a “no expectations” EU summit to look forward to here. And the next several trading days could be very cyclically important considering we have the end of the quarter approaching (some window-dressing/benchmark chasing going on in equities at the moment?) and the end of the financial year for Japan. Meanwhile the USD is teetering near multi-year lows. And the big question shortly after the turn of the quarter will be the degree to which incredibly input costs increases have squeezed corporate margins as Q1 earnings reports begin rolling out. So it appears that the risk of a major transition period might be under way during the next 2-3 weeks. Stay tuned.
In the meantime, have a wonderful weekend and be careful out there.
Economic Data Highlights
- Japan Feb. Nationwide Department Store Sales rose +0.7% YoY vs. -1.1% in Jan.
- Germany Feb. Import Price Index rose +1.1% MoM and +11.9% YoY vs. +0.9%/+11.6% expected, respectively and vs. +11.8% YoY in Jan.
- Sweden Feb. Household Lending rose +7.5% YoY vs. +7.7% in Jan.
- Germany Mar. IFO Survey out at 111.1 vs. 110.5 expected and 111.3 in Feb.
Upcoming Economic Calendar Highlights
- US March Final University of Michigan Confidence (1355)
- US Fed’s Plosser to Speak (1615)
- US Fed’s Fisher to Speak (1700)
- EuroZone ECB’s Gonzalez Parmo to Speak (2015)
- US Fed’s Bullard to Speak in France (Sat 0800)
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