Aussie and its ilk are playing catchup to the downside as the
deteriorating risk conditions stemming from the Euro Zone’s existential
crisis are making waves all across global markets.
If you missed it Friday, please see our bigpicture look at the G10 currencies, a series of charts
showing the relative strength of each of the G10 currencies against an
evenly weighted basket of the remainder of its G10 peers.
Dreading the drachma?
The Euro continues to suffer in the wake of Stark’s exit from the
ECB, on rumors that Germany is girding itself for a Greek exit from the
EU and on ongoing signs that the ECB and EU governments are simply
unable to get ahead of the galloping fears of a systemic banking crisis
triggered by the lack of trust in sovereign debt. CDS’ on Italian
sovereign debt ended last week at a new high for the cycle and Greek
2-year debt trades at a stratospheric yield of 57%, suggesting the
investors believe they will receive well under 50 cents on the Euro for
their Greek debt in the event of a default. Greece is still making quite
a show of trying to meet fiscal targets as Finance Minister Venizelos
announced a plan to cut a month’s salary from all publicly elected
officials and to impose a new property tax that would be collected via
consumers’ electricity bills to secure collection (Greece has an
enormous tax dodging problem). The measures are looking increasingly
desperate and untenable and we can be sure that there won’t be a third
bailout option for Greece – it will either meet the targets or opt to
default, with odds rapidly rising of the latter.
European bank equities also continue to crater, led by French banks
like SocGen and BNP Paribas. These stocks are the easiest way to track a
“live barometer reading” on EU breakup fears in addition to the Euro
itself. The technical break of the 1.40 area in EURUSD has also opened
up an enormous area that has few support levels for guidance until we
get down close to 1.30.
Chart: EURJPY
As bond yields continue to crate, the BoJ has only been barely
successful in holding the line on JPY appreciation against the USD, so
the yen is rushing higher elsewhere. Against the Euro, the JPY reached
its strongest level since well before the actual circulation of the
single currency, trading as low as 104.00 before this article’s pixel
time. Japanese officials continue to rail against the strong yen and the
new FinMin Azumi promised “bold action, especially against speculative
trading”. Looking at the JPY charts today, it will take bold action
indeed – can Japan succeed in pulling an SNB?
Of course, as the Euro is grabbing all of the headlines for its
weak ways, it’s hard for us not to point out that the single currency
has rallied, yes, rallied 200 pips versus the Aussie in today’s trading
from the lows, as our comment late last week that the Aussies would have
some catching up to do on the downside if risk appetite continue to
sour proved correct.
Focus this week
The main focus this week will continue to be on the Euro Zone and
whether we will continue to see the pressures pushing the Euro into the
abyss or whether the ECB and EU can muster a sufficiently robust
response to give the market some pause. No signs of the latter just yet,
by any means.
In the UK, a government plan to ring fence retail banking
operations from investment banking ones is under consideration. Banks
are obviously against this due to its high cost, and though the pound
continues to thrive as an anti-Euro and a benefactor in the face of risk
aversion, it’s popularity may wear off a bit if this package moves
toward passage. EURGBP has in fact bounced considerably on the day after
the recent steep retreat, with 0.8675 as a key resistance/pivot area.
This week we should look for the first reactions to the new Obama
stimulus plan and a taking of the Republican opposition’s temperature
that may give an indication on how difficult the birthing process will
be for a new stimulus bill. Again, simple game theory dictates that the
Republicans will be moved to pass some similar version of this bill,
perhaps with a few future spending cut caveats as Obama has crafted a
package proposal that could have easily been created by non-Tea party
Republicans. The more critical issue
It will be interesting to hear what the Dallas Fed’s Fisher has to
say at his speech on monetary policy later today. He is the most vocal
of the voting dissenters and may use today’s appearance to speak out
against the next steps the Bernanke majority is considering, not that
this will necessarily deter them as they meet next week.
On the economic data front, we’ve got inflation data up from the UK
tomorrow and from the US on Wednesday (PPI) and Thursday (CPI). US Aug.
Retail Sales data is set for release on Wednesday as well. Among the
central banks, the RBNZ is set to meet Thursday, as is the SNB. The
first two regional US manufacturing surveys, the Empire and Philly Fed,
are set for Thursday, though last time around, these were misleading as a
still resilient Chicago PMI was a better indicator of a better than
expected ISM manufacturing number in August. Stay tuned.
Economic Data Highlights
- China Aug. Trade Balance out at $17.76B vs. $24.6B expected and $31.5B in Jul.
- China Aug. New Yuan Loans out at 548.5B vs. 500B expected and 492.6B in jul.
- Japan aug. Domestic CGPI out at -0.2% MoM and +2.6% YoY vs. -0.2%/+2.7% expected, respectively and vs. +2.9% YoY in Jul.
- Australia Jul. Trade Balance out at 1826M vs. 1900M expected and 2052M in Jun.
Upcoming Economic Calendar Highlights (all times GMT)
- US Fed’s Fisher to Speak on Monetary Policy (2000)
- New Zealand Q2 Manufacturing Activity (2245)
- UK Aug. RICS House Price Balance (2301)
- New Zealand Aug. QV House Prices (0000)
- Australia Aug. NAB Business Confidence/Conditions (0130)
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