Trichet was dovish on growth and inflation, but no new liquidity
measures were announced, EURUSD tried through 1.40 initially, though
we’ve got the key Obama speech on tap much later.
BoE “Decision”
The BoE’s pass on altering the rates and more importantly the asset
purchase target was apparently a bigger surprise than we would have
suspected, as sterling climbed steeply versus the Euro and the USD in
the wake of the BoE announcement today, despite a lack of further
details. Stay tuned for the minutes in two weeks and the
Euro rushes lower initially on Trichet rhetoric, but...
Trichet’s assessment of economic conditions were distinctly worse
than in previous meetings, with downside risks deemed to outweigh upside
risks on growth. On inflation, the rhetoric was the most dovish for
some time, as Trichet said that inflation risks were no longer on the
upside. This was not exactly a super-dove on display today at the press
conference, however, as Mr. Trichet still describes policy as
accommodative, no exactly a setup for a rate cut. As well, he stated
that while the ECB stood ready to provide liquidity, it is not an issue
for Euro area banks. Still, March 2012 Euribor futures jumped 7-8 ticks
shortly after the press conference got away and the German 10-year yield
dropped to an incredible sub-1.84% level.
Technically, a break on the close below the psychologically and
technically significant 1.40 area and below the slightly higher 200-day
moving average would be a bearish development, though let’s see where we
stand at the end of this week. If the EURUSD remains below 1.40 beyond
the US FOMC meeting later this month, EURUSD may open up a significant
new downside range toward 1.30 eventually. If Obama doesn’t deliver
tonight, the risk is that we remain interminably rangebound. The latter
also becomes more likely if we trade above 1200 in the S&P500 in the
days and weeks ahead (as a rough barometer of risk) and the bears lose
their mojo.
US Data
US data was mixed, with a much smaller than expected trade balance,
but a slightly worse than expected initial weekly claims data point,
which stubbornly remains above 400 after showing signs of dipping a few
weeks ago.
The Scandies
We noted recently that Scandies seem to have decoupled from the
normal pro-risk correlation (historically much stronger for SEK, as NOK
tends to be more strongly correlated with crude). After the last couple
of days of action, we now need to underline the interesting behavior of
the Swedish krone, which has strengthened very sharply despite a
relatively dovish performance from the Riksbank this week, after which
we see two-year government notes yielding almost 75 bps below the
overnight rate now. For support of the idea that the market is
attempting to use the Scandies as the next best safe havens after the
CHF blow-up we offer the chart below. Eventually, the markets should
watch out, however, as the liquidity in these currencies is a fraction
of the liquidity in the CHF and the reaction pattern from the government
and central banks could eventually be the same. The question is at what
level and over what time frame is eventually? Norges bank in particular
has experience with fighting a strong krone and both CB’s and
governments will be quick to complain if we strengthen another few
percent even from these levels.
Chart: EURSEK vs. German/Swedish rates
The rate picture for EURSEK has tended to more or less follow the
interest rate spread of the two currencies for some time, but over the
last few days, we’ve seen an interesting divergence in this trade, with
widening differentials in favor of the Euro not seeing any reaction in
EURSEK, which has instead fallen sharply. Part of that can be written
off as a desperate search for alternatives after the franc implosion as
the EU’s woes are ongoing. How long will this divergence last? Normally ,
the SEK is a pro-cyclical currency highly dependent on export markets.
If theEuroZone economies are weakening, this would normally be
considered a SEK-negative, but will the market prefer to focus on this
or on Sweden’s healthy fiscal picture.
Looking ahead
Obama is set to speak at midnight London time and 1900 New York
time – normally a rather illiquid part of the trading day. But the
market reaction may come despite the time of the day depending on the
contents of that speech, so stay tuned. Again, the critical component is
the degree to which Obama hints at a new version of the Homeland
Investment Act that would allow companies to repatriate foreign profits
at advantageous/no tax. It would be extraordinarily interesting if the
HIA-2 hint is able to see the dollar decoupling more decidedly from its
negative correlation with risk and strike out on its own path.
Economic Data Highlights
- UK BoE Announces left interest rate and Asset Purchase Target as expected
- EuroZone ECB left interest rate unchanged as expected
- Canada Jul. Building Permits out at +6.3% MoM vs. -1.5% expected
- Canada Jul. New Housing Price Index out at +0.1% MoM vs. +0.3% expected
- Canada Jul. International Merchandise Trade out at -0.75B vs. -1.0B expected and –1.37B in Jun.
- Us Jul. Trade Balance out at -$44.8B vs. -$51.0B expected and vs. -$51.6B in Jun.
- US Weekly Initial Jobless Claims out at 414k vs. 405k expected and 412k last week
- US Weekly Continuing Claims out at 3717k vs. 3706k expected and 3747k last week
- US Weekly Bloomberg Consumer Comfort Survey out at -49.3 vs. -49.1 last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly Crude Oil and Product Inventories (1500)
- US Fed’s Bernanke to speak (1730)
- US Jul. Consumer Credit (1900)
- US President Obama Speaks before Congress (2300)
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