Euro Weak in the Knees Again as Week/Month/Quarter Ends

The Euro ground lower today after a German minister said further EFSF expansion was not likely and despite a very high CPI estimate for September. Bonds rebounded from key support and risk remains on the defensive.

The US and German 10-year benchmarks continued to flirt with the 2 percent yield level, but both have failed to take out that support level and the strong rebound in bonds today suggested a renewed bout of safe haven seeking, particularly after a very high Euro Zone September CPI estimate failed to generate sustainable selling interest. Ahead of today’s trading session, Germany’s economy minister Roesler said in a television interview that German lawmakers were unlikely to approve another raising of the EFSF ceiling or an effective increase in the fund through leveraging. Among our usual indicator suspects: Euro 3-month basis swaps also eased another couple of bps lower (more pressure on Euro) and Italian/German yield spreads widened out again by the early US hours after attempting to tighten earlier in the day.

The action in bond markets is spilling over to JPY crosses as today marks the end of the first half of the year in Japan and the end of the quarter for the rest of the financial world. EURJPY topped  out again well above 104 but was pushed sharply back lower on the enthusiastic rally in Bunds today. It is interesting that USDJPY remained joined at the hip despite considerable volatility in rate spreads between the US and the Japan this week – apparently the market is content to express the volatility in rate spreads in non-USD terms, but USDJPY can’t remain in a vice grip forever. The Bank of Japan will see considerable pressure if we get another wave of risk off soon and global government bond yields probe their recent cycle lows.

Looking ahead
Some of the moves yesterday across markets certainly looked a bit like they might have been driven by end of month/quarter flows and that kind of activity could continue for the rest of the day today. This week has mostly been one vicious churn for those looking for a directional move – though a swoon in risk in the US session today could put an exclamation point on weekly candlesticks. Next week offers plenty in the way of even risks, certainly worth mentioning here, though we are likely to refresh this list on Monday:

• Central Bank Meetings: RBA (Wednesday) and ECB, BoE (Thursday), BoJ (Friday)
• Euro Zone: EcoFin meetings on Monday and Tuesday
• US Data: ISM Manufacturing (Monday), ISM Non-Manufacturing (Wednesday), US Employment Report (Friday)
• Other Highlights: Japan Q3 Tankan (Monday) Fed’s Bernanke to Testify (Tuesday) Canada Employment Report (Friday)

The Bernanke appearance on Tuesday will be an interesting appearance before the Joint Economic Committee, which includes Ron Paul, who will likely take the opportunity once again to bash the Fed and demand it be audited. Let’s not forget he’s a presidential candidate with a campaign in need of a boost as well.

Chart: AUDUSD Weekly 
AUDUSD challenging key levels last week and this week, confirming the huge trendline break from the 2009 lows. From here, there is a gap down to the sub-94 area and then not much to hold the pair until 0.8250. 

We asked this Monday whether the market might be treacherous for the balance of the week. (“Could heavy positioning and heavy batch of event risks mean more of this kind of churn in markets for the rest of the week?”) Next week is unlikely to yield the same result – either the risk bears give up here for a short while and the range expands upward a bit (though without changing secular trend) or the action heats up again to the downside and we start to see a full capitulation unfolding. Regardless, it behooves all of us to be careful out there, particularly since, given the backdrop, the odds of the latter remain elevated.


Economic Data Highlights

• Germany Aug. Retail Sales out at -2.9% MoM vs. -0.5% expected
• Norway Sep. Unemployment Rate out at 2.5% vs. 2.6% expected and 2.7% in Aug.
• Norway Aug. Credit Growth Indicator out at +6.5% YoY vs. +6.3% expected and +6.3% in Jul.
• Euro Zone Sep. CPI Estimate out at +3.0% YoY vs. +2.5% expected and +2.5% in Aug.
• Switzerland Sep. KOF Swiss Leading Indicator out at 1.21 vs. 1.30 expected and 1.61 in Aug.
• US Personal Income out at -0.1% MoM vs. +0.1% expected
• US Personal Spending out at +0.2% MoM as expected 
• US PCE Core out at +0.1% MoM and +1.6% YoY vs. +0.2%/+1.7% expected, respectively and vs. +1.6% in Jul.
• Canada Jul. GDP rose +0.3% MoM and +2.3% YoY as expected and vs. +2.1% in Jun.

Upcoming Economic Calendar Highlights (all times GMT)

• Chicago Sep. Chicago PMI (1345)
• US Sep. Final University of Michigan Confidence (1355)
• US Sep. NAPM – Milwaukee (140)
• US Fed’s Bullard to Speak (1500)
• China Sep. PMI Manufacturing (Sat 0100)
• Australia Sep. AiG Performance of Manufacturing Index (Sun 2230)
• Japan Q3 Tankan survey (Sunday 2350)
• China Sep. Non-manufacturing PMI (Mon 0100)