FX Update: EURSEK tries sub-10 levels on Riksbank

John J. Hardy, FX Consultant, Saxo Bank

FX Update: EURSEK tries sub-10 levels on Riksbank

Riksbank
The Riksbank left rates unchanged at 0.25% as universally expected, but raised expectations for the trajectory of its tightening regime by indicating average expected overnight rates for the next few years higher than the market was already anticipating. The Riksbank suggested that tightening could begin already this summer, rather than a the later timetable expected. It said that average repot rate would be 0.4% for this year, 1.8% for next year, and 2.8% on average in 2012. The Rikbank's Svensson wanted to cut rates to 0% at this meeting.

Today's decision and rhetoric from the bank sent interest rates at the front end of the Swedish yield curve and the Swedish krona sharply higher. The move today may have been especially sharply as this news came at the key actual and psychological support area around 10.00. This (around 9.95 as of this writing) is the lowest level for EURSEK since the weeks after the credit crisis went into full gear in late 2008.

EU Summit in Greece
Around noon GMT today, Mr. Barroso announced that "an accord on Greece has been reached", but that the announcement on what was agreed would come later. This got the market's hope up slightly that something Euro-positive would emerge, but the later announcements that the EU was working on a lending facility for Greece, but with few specifics, this was considered Euro-negative and EURUSD and EURGB sold off sharply. As well, an official was quoted as saying that it was not yet time to begin issuing EuroBonds, increasing the idea that EuroZone states are not willing to go the route of full fiscal integration and being responsible for other nations' debt. A confirmation of the Euro-negative tilt to developments was a rewidening of Greek debt spreads after the announcement.

US Jobless Claims
Finally, an encouraging job claims number out of the States today, which puts the trend back on track for improvement. Remember that claims need to drop about another 100k on average in coming months for the US job market to show stabilization.

Looking ahead
After the strong Australian employment data overnight and a rally in the risk appetite in general, the market has taken the action up to some key resistance areas in the higher beta FX pairs correlated with risk appetite, like AUDUSD and NZDUSD, not to mention the JPY crosses, where especially 90.00 in USDJPY is in focus. Other areas to watch on the close for the day/week are the 0.7000 area in NZDUSD and the 0.8865 area in AUDUSD (0.382 Fibo retracement of the most recent wave.)  If these levels don't hold, then we could be pushing into a bout of higher risk appetite for a while. Stay tuned.

Tonight we have New Zealand Retail Sales and House Prices and House Sales. Tomorrow we have the estimate for Q4 European GDP and the US Advance Retail Sales for January, as well as the initial reading for the February University of Michigan Confidence.

Be careful out there. Conditions in the market have been heating up lately, so continued volatility is a significant risk.

Economic Data Highlights

• New Zealand Jan. Business PMI out at 52.0 vs. 53.0 in Dec.
• Australia Jan. Employment Change rose 52.7k vs. 15k expected and 37.5k in Dec.
• Australia Jan. Unemployment Rate fell to 5.3% vs. 5.6% expected and 5.5% in Dec.
• China Jan. Producer Price Index rose 4.3% YoY vs. 3.5% expected and 1.7% in Dec.
• China Jan. Purchasing Price Index rose 8.0% YoY vs. 3.0% in Dec.
• China Jan. CPI rose 1.5% YoY vs. 2.1% expected and 1.9% in Dec.
• China Jan. New Yuan Loans rose to 1390B Yuan vs. 1375B expected and 380B in Dec.
• Germany Jan. Wholesale Price Index rose 1.3% MoM and 1.9% YoY vs. +0.2/+0.2% expected, respectively
• Switzerland Jan. CPI fell -0.1% MoM and rose +1.0% YoY vs. -0.4/+0.8% expected, respectively, and vs. +0.3% YoY in Dec.
• Sweden's Riksbank kept interest rates unchanged at 0.25% as expected
• Canada Dec. New Housing Price Index rose +0.4% MoM vs. +0.3% expected
• US Weekly Initial Jobless Claims out at 440k vs. 465k expected and 483k last week
• US Weekly Continuing Jobless Claims out at 4538k vs. 4600k expected and 4617k last week

Upcoming Economic Calendar Highlights

• New Zealand Jan. REINZ Housing Price Index (2100)
• New Zealand Dec. Retail Sales (2145)
• Japan Jan. Consumer Confidence (0500)

Trading commentary

10 February 2010

FX Closing Note: Bernanke talks interest rate hikes "at some point"

John J. Hardy, FX Consultant, Saxo Bank

FX Closing Note: Bernanke talks interest rate hikes "at some point"

Bernanke
Plenty of ups and downs today, first with all of the noise on Greece and now with the Fed's Bernanke out with written testimony (see here for the full text in all of its boring glory) that he was unable to present to Congress today because Washington is buried in snow. The testimony consisted mostly of a recap of the Fed's actions throughout the crisis and a justification thereof, a description of how the Fed's various special facilities have been, are beeing, and will be unwound, and finally, an explanation of the mechanisms the Fed can employ in the future to withdraw liquidity from the system when it proves necessary, such as the use of already tested reverse repos, tri-party reverse repos, special term deposits, outright sales of securities on the Fed's balance sheet, and the manipulation of the interest rate on bank's reserves held at the Fed. Most importantly, however, the market focused on Bernanke's mention of the need "at some point" to "tighten financial conditions by raising short-term interest rates and reducing the quantity of bank reserves outstanding." This sent the USD sharply higher and also saw a sharp correction in interest rates higher across the curve. Later in the day, the USD lost much of its gains as the market pondered whether the USD is still correlated with risk appetite and how strong the statement actually was and whether other central banks might actually raise rates even faster than the Fed in the event that we resume policy tightening the world over.

Regardless of what the market thought of the dollar, the clear effect of today's interest rate response to Bernanke's rhetoric was JPY negative, and USDJPY jumped to 90.00 again, without effectively penetrating it. This is an interesting pivot point for the JPY here. Our old, old rule of thumb is that if you see four days of pausing in the market action after a significant impulse (today being the fourth day of indetermination after the recent swoon in USDJPY), there are much higher odds of a reversal. And certainly, USDJPY already looks a little mispriced to the low side already and will look even more so if this reversal in rates is decisive and continues from here.

Chart: USDJPY and US short and long interest rates
The following chart shows USDJPY (white line) and US short (yellow) and long (red) interest rates. Any further rise in interest rates would seem to be USDJPY supportive.

 Chart: USDJPY

The Ichimoku cloud clearly in focus here, as is the 55-day moving average likely, as well as the psychological 90.00 level.

Looking ahead
So watch interest rates and of course, risk appetite tomorrow. Both higher rates and higher risk appetite are especially JPY negative, probably most so for the likes of AUDJPY and NZDJPY and may not necessarily be especially positive for the USD, which would look better on a combination of risk aversion and higher interest rates. The other thing to watch for is a further shrinking of Greek interest rate spreads on any potential news about the rest of the EuroZone’s plans to do something about Greece (any solution is likely to be a "tough love" solution that attempts to minimize the moral hazard an all-out bailout would have triggered.) The key short term resistance area for EURUSD remains 1.3840. Euro optimists might say the we have already reached a major target recently, so we might ought to look for a further consolidation of the downtrend with a move to higher resistance before the downtrend resumes further out.

Data on tap
Remember that tonight features the Australian employment data and New Zealand retail sales data, as well as Chinese inflation data. Tomorrow we have the Riksbank (EURSEK at key levels) and then the US initial jobless claims in the North American session, which have been getting even more focus than normal due to a string of rather iffy readings after many had though a firm downtrend in claims had been established.