Big picture G10 Currency Charts

The charts below are for each of the G10 currencies versus an evenly weighted basket of the remainder of their G10 peers. The charts are small (as we work on updating the blog to allow links to larger graphics), but they nonetheless do cover quite a bit of ground – 2500 data points for each in fact, which hopefully gives an interesting perspective. Each of the time series starts at indexed 100 as of early February 2002. (The start point of the index changes with every refresh of the charts on  a rolling basis.)

Note that the charts were cut before the last leg of the action in the early US session after the news that Stark will resign from the ECB (rumored because of disagreements on bond buying) and on news ECB will back off on penalty rates for banks accessing emergency facilities.

USD

The US dollar has been dropping forever – note that while the dollar index crossed the 200-day moving average, the USD/G10 basket has not yet crossed this important level, though it is trading at the highest level in months and may be confirming a transition to a bullish trend after the recent basing action and loss of downside momentum.

EUR

How ironic is it that, as the EU is experiencing its worst existential crisis to date, the Euro is back close to its lowest levels in years….which are also the lowest levels since the Euro was launched amid intense skepticism over the entire idea of a single currency back in 2002.

JPY

The JPY remains resilient and relatively strong – but will likely only be so as long as rates remain absurdly low and/or the BoJ and Japanese government steal a page from the SNB’s book on the intervention front

GBP

GBP is experiencing a bit of a revival on Euro misery and as its down trend has been losing steam for a long time. Could the market be getting too complacent on further GBP weakness?

CHF

The magnitude of the run-up and the subsequent reversal is breathtaking, but leaves us, amazingly, still poised above the 200-day moving average! There’s a lot more room for franc weakness if the SNB’s intervention project succeeds.

AUD

AUD is extremely overvalued if the Asian growth story in any way derails. The focus has been intense on Europe, but many risk appetite signals are flashing around the world, which are most often associated with Aussie downside. Aussie hasn’t been garnering sufficient notice.

CAD

CAD has been a relatively low beta currency over the years relative to some of its peers. It is generally out of favor now, but could put up a fight or at least avoid broad weakness if the US economy and USD prove stronger than the market is currently expecting.

NZD

The NZD bull market has enjoyed an Indian summer, but it may fade on the potential for an Asian hiccup and if the post NZ earthquake GDP bump fades in the months ahead.

SEK

The krona is gaining favor as a safe haven from Euro turmoil. It may rally passively for a while, but historically has a hard time if its export markets are threatened.

NOK

NOK is very credible as a safe haven from a fundamental standpoint and has room to rally further, but what point does the Norges Bank begin to rattle it saber when EURNOK is already at almost decadal lows?

Euro crumbles again – EURJPY punished for steep losses

The Euro continues to struggle for support as Euro Zone sovereign debt spreads for Italy and Spain continue to ratchet wider. Meanwhile, headline risks looms in the background on the US debt ceiling.

Risk was off steeply late yesterday in the US session, helping to boost the USD in some of the crosses, though the generally pro-risk/commodity currencies have withstood the pressure fairly well in today’s trade, such that the USD is only appreciably higher against the mightily struggling Euro, where spreads continue to ratchet wider on the likes of Spanish and Italian debt.

Klaus Regling, the head of the EFSF bailout facility, said today that the EFSF won’t be employed unless the ECB and EU member states agree. This would mean a cumbersome process for damping the risks of debt spread contagion, one would think, and dims the prospect of the EFSF serving as a kind of “back door” to a tighter EU fiscal union. Again, the celebration of last week’s bailout was clearly premature.

Chart: EURUSD
EURUSD drooped to a key support area around 1.4270/80 (area slightly above there was quite important too, as the steep rising line of consolidation – shown in blue – was taken out above 1.4300, and we also had the 55-day moving average). 1.4270/80 is where we have the previous high and the 0.382 Fibo retracement levels. The pair needs to find support in this pivot zone it would seem, if it wants to keep the focus on the higher end of the range. If it fails to garner support, the 1.4100 area might be the next focus.

Odds and ends
The RBNZ managed to tack on another few bps of policy tightening on top of already high expectations that the bank is gearing up to hike interest rates in the near future. Governor Bollard said that as long as “global financial risks recede” (a very important caveat – we’re seeing more waxing rather than waning globally, even if local conditions in NZ have been quite strong), he saw “little need for the March insurance cut to remain in place much longer.” While it’s undeniable that carry considerations have operated in favor of the kiwi on the back of this statement, it remains tough for us to see much additional upside for the currency broadly speaking if the mood surrounding risk appetite remains sour.

US weekly jobless claims finally notched a reading below 400k for the first time in months, though that reading will inevitably be adjusted higher  - likely to above the 400k mark – next week. Still, the data point is encouraging for the view that the recent uptick in claims is fading again.

As the Euro struggles, crude oil prices have remained relatively stable and the NOK has as well, with EURNOK once again threatening the massive 7.70 area that has held it since time immemorial (only one three-week bout of activity below that level since 2003). Certainly from a sovereign stability angle, the NOK remains attractive – but that currency has tended to trade in positive correlation with economic growth in its more recent history. It’s a conundrum for EURNOK traders – which horse is NOK riding on, or is it trying to ride on both at the same time. The action for the last several months has been totally inconclusive.


Looking ahead
The market picture is rather confused, to say the least, as there is no real apparent safe haven in this market – a theme we have touched on a bit lately as have other commentators. Have a look over at FTAlphaville’s blog entry on Rochdale analyst Dick Bove’s assertion that the markets need a new safe haven – and can’t find one – a very interesting read and reflects the market’s dilemma here.

There are more maneuverings going on in Washington today, with the Senate and House each voting on their own versions of bills aimed at limiting debt and lifting the debt ceiling. Boehner’s version appears dead on arrival and would be vetoed by Obama anyway. And the Senate’s Reid’s bill may not pass muster if it is put up for a vote in the House. Are we going to have to test whether the US government can continue to function normally beyond the August 2 deadline? The uncertainty here is thick.

Perhaps the most remarkable aspect of the debt ceiling debate is that there has been no proposal forwarded by either party that takes an appreciable bite out of the size of the deficit. The yearly deficit shortfall is on the order of $1.5 trillion or more yearly, and the supposedly fiscally conservative Republicans want to cut less than a trillion over ten years, with most cuts coming from projections for better economic growth?

Watch out for the heavy load of Japanese data up in the Asian session tonight, though the market doesn’t generally react much to Japan’s economic numbers – it’s usually a yield focus for the JPY. On that front, yesterday’s 5-year went off relatively orderly, though foreign participation dropped (wonder why) and the market generally judged it poorer than hoped, sending yields briefly higher and the JPY lower for a time. But the bond market has recovered again into today and the JPY is stronger again, with EURJPY pressing down toward the key 110 area. Today we have a 7-year auction, with results (if all goes as normal) published around 1700 GMT.


Economic Data Highlights

• New Zealand RBNZ left cash target unchanged at 2.50% as expected
• Japan Jun. Retail Trade rose +2.9% MoM and +1.1% YoY vs. +1.5%/-0.5% expected, respectively and -1.3% YoY in May
• Sweden Q2 Manufacturing Confidence out at 0 vs. 7 expected and 6 in Q1
• Sweden Jul. Consumer Confidence out at 12 vs. 15.5 expected and 16.7 in Jun.
• Sweden Jul. Economic Tendency Survey out at 104.4 vs. 109.2 expected and 109.9 in Jun.
• Sweden Jun. Retail Sales rose +3.1% MoM and +3.4% YoY vs. +0.7%/+0.9% expected, respectively and vs. -0.9% YoY in May
• Sweden Jun. Unemployment Rate out at 8.8% vs. 8.6% expected and 7.9% in May
• Germany Jul. Unemployment Change fell -11k vs.-15k expected and -8k in Jun.
• Germany Jul. Unemployment Rate out at 7.0% as expected
• EuroZone Business Climate Indicator out at 0.45 vs. 0.83 expected and 0.95 in Jun.
• EuroZone Jul. Economic Confidence out at 103.2 vs. 104 expected and 105.4 in Jun.
• EuroZone Jul. Industrial Confidence out at 1.1 vs. 1.6 expected and 3.5 in Jun.
• EuroZone Jul. Services Confidence out at 7.9 vs. 9.2 expected and 10.1 in Jun.
• UK Jul. CBI Reported Sales out at -5 vs. +2 expected and -2 in Jun.
• US Weekly Initial Jobless Claims out at 398k vs. 415k expected and 422k last week
• US Weekly Continuing Claims out at 3703k vs. 3700k expected and 3720k last week

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly Bloomberg Consumer Comfort Survey (1345)
• US Jun. Pending Home Sales (1400)
• US Fed’s Lacker to Speak (1645)
• US Fed’s Williams to Speak (1830)
• New Zealand Jun. Building Permits (2245)
• UK Jul. GfK Consumer Confidence Survey (2301)
• Japan Jul. Markit/JMMA Manufacturing PMI (2315)
• Japan Jun. Overall Household Spending (2330)
• Japan Jun. Jobless Rate (2330)
• Japan Jun. National CPI (2330)
• Japan Jun. Industrial Production (2350)
• Australia Jun. RPData-Riskmark House Price Index (0030)
• China Jul. MNI Business Condition Survey (0135)
• Japan Jun. Construction Orders and Housing Starts (0500)

Risk still has pedal to the metal

Our measures of risk appetite across markets suggest that traders are still aching to put on risk, even as the USD weakness is not particularly pronounced ahead of the weekend. What gives? Also, a look at the EURCHF breakout and what might be driving it.

USD and G-20
We noted that markets were finally beginning to move in different directions this morning. Not much has changed on that account today, though the ranges are rather muted ahead of the weekend as the market mulls whether anything is. The crazy Geithner idea could actually gain acceptance and come to pass in some form simply because it is an easy framework to agree on and an impossible one to enforce. This article from Reuters aptly compares the Geithner plan with the EU stability pact that has proven so toothless even for the comparatively tight-knit EuroZone.

Risk appetite: still pedal to the metal
While bonds have eased lower (yields higher) and the market has taken its foot off the “death to fiat currencies” trade as gold and silver consolidate, other measures of risk appetite expanded sharply over the last couple of trading sessions, including junk bond spreads and corporate credit measures (a very strong start to earnings season is helping out there). The pause in the USD down move has also seen FX implied volatility recede a bit. Emerging market bond spreads remain relatively supportive of risk positions as well. But while there are no real signs of danger at the moment for the risk bulls in many of these kinds of indicators – we would suggest that complacency is dangerously higher and speculative positioning very heavy, judging from evidence in sentiment surveys, the fact that we’re seeing record inflows into EM equity funds, and based on positioning surveys by the CFTC. We must also consider the idea that the Bush era tax cuts may come to an end after all on the potential for mad and lame duck Democrats in no mood to cooperate with Republicans ahead of the changing of guard early next year. The tax cuts are set to expire on January 1. This Reuters article offers good coverage.

As for our chart below – it shows the USD carry traders taking a pause here even while risk appetite has moved higher – but we have would postulate that the USD could be the tail wagging the dog at the moment because of the strength of the market’s USD view.

 EURCHF and interest rate spreads.
EURCHF has been a bit reluctant to participate in the EUR strength evident in other crosses, but now we finally see the market bidding up EURCHF on its recent break of key resistance around 1.3500 after a false break yesterday. The reason for the CHF weakness? Perhaps the panic easing off on the precious metals trade is one reason, but also the interest rate spread has long ago started stretching more drastically to the Euro’s advantage, as the below chart of the  2-year swap spreads between the EuroZone and Switzerland indicate. The rate EUR rates are headed higher lately is unsustainable in our view, though one can also argue that there is more upside to price into this pair if spreads are the only focus. Further out, we wonder how long the market can fail to focus on the longer run sovereign debt/EuroZone framework issues and the potential for a situation like that in France to spiral out of control. At present, the market is trading the Euro like Germany is the only country in the bloc…

Norges Bank gets new Governor
Norges Bank's new governor, Oeystein Olsen, was appointed today and his first speech suggested he will do little to rock the boat and make Norway stand out in any way from the international policy scene on monetary policy as he suggested that the krone's strength would be a determinant of interest rate policy. "Norges Bank cannot go alon for sure; international developments including itnerest rate paths abroad will potentially affect" policy "via the exchange rates", he was quoted as saying in a Businessweek article today.

As for the market reaction to today's announcement, interest rate moves suggested that we have a fairly dovish new governor on our hands, though the FX reaction was far more NOK positive. The next key supports in EURNOK are 8.0500 (a previous high) and the psychologically important 8.00 level, which is just above 8.00. It would seem that Mr. Olsen's would take away some of the potential downside for the pair, though the Norges Bank has long had a tendency to quickly intervene verbally in the market on large currency moves. The chart below suggests that there is no pressure at all on the downside from an interest rate perspective.

FX Options Update: Uninspiring volatility market

Michael Schmeja, Global Head of Derivatives Sales, Saxo Bank

A very uninspiring spot market keeps volatility unchanged, nearly to the figure compared to yesterday. Some trades in the broker market that are worth to mention:

EURUSD Put has been bought, 1 month, 1,2300 at 13.30 vol in about 300 Mio

EURJPY 15 delta strangles, 1 year, at 19.50 vol in 100 Mio per leg

Small bits and pieces traded in USDJPY and AUSUSD with both sides in equal demand for shorter maturities.

I will sell out my remaining 25% spot EURJPY at 111.50 with the option due to expire on Thursday. No other changes.

Short term Trading ideas:

EURJPY

Comment:

I buy spot, notional 1 at 111.25

I buy expiry 1 month 15th of July a 109 EUR Put, notional 1

I sell expiry 1 month 15th of July a 114 EUR Call, notional 1

Cost of 23 JPY pips on a notional of 1, after I bought back the 0.55 overhang. I sold 75% of my spot position at 111.95. Depending on the price action I will trade the spot until expiry against the option.

EURNOK

Comment:

Sold EURNOK Call, Strike 8.0700, Exp 1 month, 26th of July for 510 NOK pips

FX Options Update: Volatility keeps trading sideways to lower

Michael Schmeja, Global Head of Derivatives Sales, Saxo Bank

The USD regained a bit of ground after Fridays stronger closed and in early Asian and Europe trading. Volatility is a bit of a mixed bag. While we see the 1 months atm a tad higher in EURUSD and cable, EURUSD is 12.35 after 12.00 and cable is 10.85 after 10.45 on Friday, USDJPY volatility is unchanged. The JPY crosses look a touch more offered about 0.2-0.3 lower than Friday.

I would expect most lows we did see Friday to act as support, in fact for cable for example we haven’t traded below at 10.30 handle after Lehman’s collapse in 2008. If the range trading persists we shall see new pressure coming up on volatility. There have been no large trades in the brokers. Deals worth of note have been in USDJPY after the election where mainly short dated upside was in demand with no significant changes in volatility.

Risk reversal have increased a bit in EURUSD and cable to 1.20 from 0.95 in EURUSD and 1.35 from 1.20 in cable. (quotes for 1 month 25 delta’s). Not surprising with a bit more pressure on spot, but not enough to get the market excited. We have some expiries worth of note in EURUSD around 1.2600 with talk of a couple of hundred million for tomorrow.

Scandie vol is also unchanged and with spot lower I am decaying day by day my short EURNOK Call. The EURJPY structure runs out on Thursday and there will be hopefully an opportunity to sell the remaining EURJPY spot position above 112.

Otherwise, nothing to report, good luck with your trading.

Short term Trading ideas:

EURJPY

Comment:

I buy spot, notional 1 at 111.25

I buy expiry 1 month 15th of July a 109 EUR Put, notional 1

I sell expiry 1 month 15th of July a 114 EUR Call, notional 1

Cost of 23 JPY pips on a notional of 1, after I bought back the 0.55 overhang. I sold 75% of my spot position at 111.95. Depending on the price action I will trade the spot until expiry against the option.

EURNOK

Comment:

Sold EURNOK Call, Strike 8.0700, Exp 1 month, 26th of July for 510 NOK pips

FX Options Update: Volatility slightly lower in thin holiday trading

Michael Schmeja, Global Head of Derivatives Sales, Saxo Bank

Expected slow start to the week in Asia and Europe with activity to die down in the afternoon as the US markets are closed for Independence day. Volatility a touch lower in general by around half a vol. EURUSD 1 month atm at 13.40 after 13.75, cable at 11.85 after 12.05, USDJPY at 11.95 after 12.85, EURCHF 11.15 after 11.75 on Friday. JPY crosses lower too, about 1 vol compared to Friday, EURJPY 17.55 after 18.40, GBPJPY 17.15 after 18.20, AUDJPY and Gold unchanged.

We have some large expiries today and tomorrow around 1.2500, tomorrow talk of 1 bn of 1.2500in vanilla options. The AUD, we have RBA and unemployment this week, sees downside in demand which is also reflected in the high risk reversal, where AUD Put are 4.5 vols over AUD Calls for the 1 month 25 deltas.

Risk reversals for other majors are lower to unchanged, EURUSD 1.05 after 1.20, cable unchanged, USDJPY 2.30 after 2.40, EURCHF 1.00 after 1.35.

Scandie volatility unchanged as you would expect if you look at the spot.

No major changes to my positions, however should we clear out the 110.80 level in EURJPY I might start trading my long EURJPY spot.

Short Term Trading ideas:

EURJPY

Comment:

I buy spot, notional 1 at 111.25

I buy expiry 1 month 15^th of July a 109 EUR Put, notional 1

I sell expiry 1 month 15^th of July a 114 EUR Call, notional 1

Cost of 23 JPY pips on a notional of 1, after I bought back the 0.55 overhang.

EURNOK

Comment:eu

Sold EURNOK Call, Strike 8.0700, Exp 1 month, 26th of July for 510 NOK pips

FX Closing Note: Risk appetite continues to wilt

US equities attempted a small comeback today after yesterday's depressing kick-off to the corporate earnings season, but other earnings news streaming in today failed to generate enthusiasm and they dumped lower into the close. Adding to the negativity may be the Obama administration's announcement that it is considering levying a special tax on banks that were bailed out in an effort to cut the fiscal deficit and recoup some of the cost of the bailout. This is clearly an attempt at damage control from public outrage as the big banks are soon set to announce their bonuses .

Significantly, commodities also joined the risk sell-off. Crude oil sold off as warmer weather is sweeping across the US again after a recent cold snap that saw temperature records falling across the nation. Gold plummeted more than twenty dollars today as an official at China's CIC sovereign wealth said that gold is too expensive and stated that the lows are in for the USD.

China is increasingly worried about its potentially overheating economy and announced another credit constriction attempt by raising bank's reserve requirements today.  A debate is raging concerning the degree to which the Chinese economy faces a bubble in asset markets. Not so long ago, the impressive Jim Chanos weighed in on the issue (the famed short seller believes China is in a bubble state), while a Forbes article out yesterday specifically rebutted Chanos' claims. None other than the famous China cheerleader Jim Rogers has also put down Chanos' claims, saying that Chanos is a China neophyte that couldn't spell China 10 years ago.

Technical and other developments
USD - the USD was rangebound vs. the Euro and slightly weaker vs. the pound, but saw reasonable gains against the higher beta risk currencies. The performance was actually relatively solid considering the successful conclusion of the latest US treasury auction and the market likely expecting that tomorrow and Thursday's auctions of 10-year and 30-year debt will also go well. (By the way here's a handy link that shows the dates for upcoming treasury auctions, an important thing to track this year with all of the heavy public issuance.

AUD - looking very shaky suddenly on the move to risk aversion and the sharp sell-off in gold. Further downside is certainly a possibility if risk continues to turn tail, which would abort any full attempt by AUDUSD to have a go at a double top. Thursday's employment report is a big test of the situation as well.

Chart: AUDJPY
JPY crosses very much in focus at the moment with bonds rallying and risk selling off. Friday's hanging man in AUDJPY wasn't much of a signal for yesterday's action, but today saw a very steep sell-off. Interesting that this sell-off comes after an attempt at attempt at a new 15-month high.

JPY - swooped sharply stronger across the board on the trifecta of weak commodity and equity markets (and therefore weak higher risk currencies) and strong bond markets. USDJPY is fast approaching a key support area we mentioned in this morning's report at 90.00.

EUR - is performing relatively well as it has become a bit more negatively correlated than previously with risk appetite - rising sharply vs. the AUD, for example, over the last couple of days.

CAD - pulls higher through the weekly pivot at 1.0375, an interesting swing level for the rest of the week. Short term vulnerability in CAD with combination of sharp energy market consolidation

NOK - we finally see a bit of a rally in EURNOK with oil dumping today - it would seem short term risk remains to the upside, though we have to watch out for Thursday's ECB meeting.

Chart: EURNOK
EURNOK nodded its head at the oil sell-off over the last couple of days, further short term upside may be in order here as the sell-off has been long and persistent and we are headed into a major inflection point on Thursday with the ECB meeting.

Looking ahead
Some interesting vibes coming from the intermarket action today, where risk looks a  bit shaky all of a sudden after day after day of upside in equities. It would seem that the potential for volatility expansion is high. This would play most to the Aussie and Kiwi's detriment. Be careful out there as always.

FX Closing Note: CAD cries Wolf

Market action
The greenback remained on a weak footing for most of the NY session, as US treasuries tread water and equities sold off and then rebounded slightly. The JPY firmed on weaker risk appetite and finally noticed firmer Euro Bund prices that it ignored in the European session. CAD was the day's weakling as the Bank of Canada's David Wolf came out with a number of CAD-negative broadsides and as oil prices cooled sharply after posting new 15-month highs today.

Technical and other developments
USD - generally lower today, but most losses occurred in Asia, with no real follow through in later trading. AUDUSD is less than a figure off of its low for the cycle as this throwback rally is doing a full test of the top of the old rally, it seems, after all of the Fibo retracements have failed to contain the rally for long. Fitch said that it saw long term risk ("by second half of decade") of pressure on US's AAA rating if the US didn't do something to address its budget deficit over the next 3 to 5 years.

CAD - the Bank of Canada's Wolf said in a speech today that housing market strength in Canada is "striking", that a housing revival is "desirable" and that it is "premature" to suggest that the housing market is in a bubble even if must be monitored. Mr. Wolf said that it was premature to raise rates now. "If the Bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession." This helped USDCAD reverse from its new multi-month lows.

Chart: USDCAD reversal
CAD was lower across the board today on the oil price decline and Wolf comments. The bullish candlestick comes in just ahead of the old lows for the cycle and may be followed up with more upside in the coming sessions barring a renewed spike in oil.

GBP - lost ground on the Euro again and is closing up close to recent resistance levels. A new downleg for the pound in store here?

Chart: GBPJPY
GBPJPY made an ugly reversal and close on the day (bearish shooting star and outside day, as the JPY sell-off has taken a breather on bond markets that have steadied of late. If risk aversion gets nervous on the first earnings reports in coming days, JPY crosses could see some further consolidation lower.

JPY - bonds are flashing a bit of a warning light here as bonds are continuing to consolidate. The reversal today in the likes of EURJPY and GBPJPY even more so, looks rather compelling for some possible short term strength in JPY (downside for JPY crosses).

CHF - responsed very little to the SNB's warning on intervention. Later, the CHF was a bit stronger as the SNB's Hildebrand

said that if interest rates are kept at the current rate for too long term, it would create problems and that the SNB has begun to withdraw liquidity.

NOK - It would seem that EURNOK is at risk of consolidating on the reversal in oil prices, though the correction there may need to pick up the pace to add serious pressure on NOK after today's higher than expected inflation data. NOK managed to make a comeback after a spike lower early in the NY session

Looking ahead: Earnings season upon us
Besides the usua US corporate earnings are very much the focus with Alcoa traditionally kicking off the earnings season today. Stories abound on whether equities are fairly priced at present and to what degree corporate earnings will improve. The coming couple of weeks will be important for the asset markets as equity traders determine how comfortable they are with the expectations priced into the market relative to the earnings reports rolling in and companies' guidance.

Another question we have for the shortest term is how much the market is willing to bid up EURUSD ahead of Thursday's ECB press conference...

Be careful out there.