The Euro is bouncing on China’s possibly interest in propping up
the Italian bond market, but how high does the dead cat bounce take us?
Merkel is also out making a show of supporting Greece.
We’ve got the news out of the bag that China will buy Italian
bonds, but we’ve seen this story before, the last time around as Spain
was in the sovereign debt crosshairs. This could certainly make a
difference at the margin on the scale of a few days at a time,
especially when the Euro selling has gotten particularly brutal and the
market seems to have gotten too one-sided. But a Chinese bid is not a
game changer as far as European risks are concerned.
German Chancellor Merkel was out today trying to defuse the
situation, expressing the need to avoid a “disorderly process” regarding
Greece’s situation. She also pointed out this morning that the troika’s
return to Greece suggests that Athens is moving in the right direction
in dealing with its budget.
In EURUSD, we’ve got an enormous range to deal with here – if the
market decides to take it easy on the single currency for a while, we
could certainly see a retracement to the 1.3900 area without inflicting
any technical damage on the bearish trend (1.3905 is the approximate
0.382 Fibo of the massive sell-off wave we’ve completed to the sub
1.3500 lows). Meanwhile, there’s not much in the way of support below
recent lows until the 1.30 area.
Elsewhere, AUDUSD bounced with risk appetite yesterday, and the
best barometer for the latter, the US S&P500, continues to shy away
from recent lows. The first support line comes in around 1130 and the
big one comes in around 1100. This zone is key for the direction of
those currency pairs that are most sensitive to the risk on/risk off
trade, like many Aussie pairs, etc.
Chart: AUDUSD
AUDUSD bounced from the lows yesterday on the news of China
possibly buying Italian bonds. The 200-day moving average around 1.0385
is an obvious tactical resistance point as the pair has basically begun
to confirm the change of trend to the downside over the last few days.
The next downside confirmation area for the pair comes with a daily
close below the previous low daily close at around 1.0180. Further
confirmation might be found in other markets, for example, if copper
closes below the 3.90 area in the days/weeks ahead. Overnight, PM
Gillard complained that forming a “new economy” would be difficult given
the currency’s strength. The market may just offer the PM a helping
hand in the months to come as the Aussie star may have peaked for the
cycle.
Krona tumbles
Yesterday was a watershed day for the Swedish krona, which fell to
pieces against the broader market. There was no obvious data catalyst,
but last week’s Riksbank has set interest rates in a tailspin and the
yield differential versus, for example, the rest of Europe has tightened
significantly since then and was applying a good deal of pressure. We
discussed recently whether the market might be trying to use SEK as a
safe haven currency from the Euro, and whether that was a plausible idea
given the history of the currency’s pro-cyclical behavior (strong
export market and tendency to rise and fall with equity markets).
Yesterday seemed to give us our answer as SEK came unglued and zipped
all the way back above the 9.00 level. The 2-year government yield rate
is all the way down to 1.00% now versus trading well above 2.00% as
recently as July. Over the same time frame, the US 2-year rate has
shifted a mere 15 bps or so lower, so one can easily intuit what that
means for the US-Sweden yield spread and the “carry trade” of USDSEK.
Chart: EURSEK
EURSEK rallied very sharply yesterday, a rally that got underway
well before the news of China buying Italian bonds. The significance of
the 9.00 level is clearly enhanced by the 200-day moving average.
Looking ahead
Let’s see whether European official attempts to trumpet their
solidarity can stabilize the Euro for a time and whether risk appetite
stays within the range. These determine the short term momentum. On the
economic calendar, watch for the UK CPI/RPI data later, as well as the
monthly reminder of the scary UK terms of trade in the form of the
Visible Trade Balance for July. The US calendar is quiet today save for
third-tier data. Watch Australia’s Consumer Confidence level for further
signs that Australia confidence continues to crumble after the NAB
Business Confidence survey overnight notched its lowest reading since
early 2009. One wonders if we switch from white hot momentum to rangy
behavior as the market ponders next week’s FOMC meeting outcome.
Economic Data Highlights
- New Zealand Q2 Manufacturing Activity rose +2.1% QoQ vs. +2.7% in Q1
- UK Aug. RICS House Price Balance fell to -23% as expected and vs. -22% in Jul.
- New Zealand Aug. REINZ House Price Index rose +0.5% MoM vs. -0.6% in Jul.
- New Zealand Aug. REINZ House Sales rose +21.1% YoY vs. +11.7% in Jul.
- New Zealand Aug. QV House Prices rose 0.1% yoY vs. -0.4% in Jul.
- Australia Aug. NAB Business Confidence/Conditions out at -8/-3, respectively vs. +2/-1 in Jul.
Upcoming Economic Data Highlights (all times GMT)
- Sweden Aug. CPI Headline/Core (0730)
- UK Jul. DCLG House Prices (0830)
- UK Jul. Visible Trade Balance (0830)
- UK Aug. CPI/RPI (0830)
- UK BoE’s Posen to Speak (1100)
- US Aug. NFIB Small Business Optimism (1130)
- US Aug. Import Price Index (1230)
- US Weekly API Crude Oil and Product Inventories (2030)
- Australia Sep. Westpac Consumer Confidence (0030)
- Australia Q2 Dwelling Starts (0130)
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