John J. Hardy, FX Consultant, Saxo Bank
FX Update: Euro short squeeze underway?
Greece was out announcing further immediate steps aimed at staunching the bleeding in public finances with tough new measures that were expected to net almost EUR 5 billion. These measures include a 2% increase in the VAT, a rise in duties on alcohol and fuel, and a trimming of public salary "supplements" by 12%. Greek PM Papandreou said he was "awaiting EU solidarity", essentially saying the rest of the EU that Greece is doing as much as it can at the moment. Whether that is enough for France and German to risk moral hazard and some kind of official backup of Greece remains to be seen. Germany's Merkel and France's Sarkozy are to meet with Papandreou on Friday in Berlin. Markets continue to unwind their bets on a Greek blowup, with Greek bond spreads tightening fairly sharply again today (Greek 10-yr. debt trades close to 6.00% at present relative to 7.00% for a couple of days in late January).
In other news, it is reported that the European Commission wants to look into the regulation of the sovereign CDS market and the US Department of Justice has "asked" hedge funds not to destroy trading records related to their bets on the situation in Europe and the Greek crisis. Clearly, it is becoming ever tougher for hedge funds to operate in this environment, and a significant public sector activism is a powerful risk in the market at any time.
Chart: EURJPY
EURJPY posting a double bottom here over the last week and rejecting the new levels so far below the previous significant low at 120.70. The technicals suggest some rally potential, though we would also like to see EuroBunds selling off more as a confirming indicator. A close below 120.00 in the near term raises the risk of a new extension lower for this bear market. The US ISM non-manufacturing release up shortly could decide the pair’s fate in the shortest term.
EURJPY posting a double bottom here over the last week and rejecting the new levels so far below the previous significant low at 120.70. The technicals suggest some rally potential, though we would also like to see EuroBunds selling off more as a confirming indicator. A close below 120.00 in the near term raises the risk of a new extension lower for this bear market. The US ISM non-manufacturing release up shortly could decide the pair’s fate in the shortest term.
Aussie data
Australia's growth data was mostly in-line, but with the currency priced for perfection, it seems to need upside surprises to find continued strength in this market. Yesterday saw an interesting reversal in EURAUD that may be a hint that the AUD star is fading a bit within the G-10. Another chink in the Aussie's armor can be found in yet another poor showing from the AiG Performance of Services index, which continues to roll in a below breakeven levels, a bit of misfit in the data stream from Down Under, which is supposedly the G-10's poster child at the moment (spotlight shared perhaps with Canada...). Still, as long as risk appetite is marching higher and gold continues to rally, it will be tough for the market to keep a lid on this currency. (Gold marched to a new record in Euro and Pound terms yesterday).
Australia's growth data was mostly in-line, but with the currency priced for perfection, it seems to need upside surprises to find continued strength in this market. Yesterday saw an interesting reversal in EURAUD that may be a hint that the AUD star is fading a bit within the G-10. Another chink in the Aussie's armor can be found in yet another poor showing from the AiG Performance of Services index, which continues to roll in a below breakeven levels, a bit of misfit in the data stream from Down Under, which is supposedly the G-10's poster child at the moment (spotlight shared perhaps with Canada...). Still, as long as risk appetite is marching higher and gold continues to rally, it will be tough for the market to keep a lid on this currency. (Gold marched to a new record in Euro and Pound terms yesterday).
Pound rebound?
The pound trying to perk up a little today. Late yesterday, as an FT article expressed doubt on whether the UK's Prudential would be able to swallow a company of AIA's size (the deal was estimated at $35 billion). This story is certainly worth following for the trajectory of sterling. Other good news keeping the pound from a further sharp drop here were a very strong Services PMI report today and a strong Nationwide Consumer Confidence report out overnight. Let's see if this can keep GBPUSD above 1.5000 in the wake of today's US data.
The pound trying to perk up a little today. Late yesterday, as an FT article expressed doubt on whether the UK's Prudential would be able to swallow a company of AIA's size (the deal was estimated at $35 billion). This story is certainly worth following for the trajectory of sterling. Other good news keeping the pound from a further sharp drop here were a very strong Services PMI report today and a strong Nationwide Consumer Confidence report out overnight. Let's see if this can keep GBPUSD above 1.5000 in the wake of today's US data.
US ADP data
The market has initially shrugged its shoulders at the slightly negative ADP data (in-line for February, but a -38k revision to the January number) as perhaps worse levels were feared on a few weeks of weaker than expected jobless claims. Let's watch the Friday nonfarm payrolls for confirmation or lack thereof as well as the unemployment rate adjustment. Just as important, have a peek at the ISM Non-manufacturing employment subindex, which has consistently registered ugly readings since the crisis hit in late 2008.
The market has initially shrugged its shoulders at the slightly negative ADP data (in-line for February, but a -38k revision to the January number) as perhaps worse levels were feared on a few weeks of weaker than expected jobless claims. Let's watch the Friday nonfarm payrolls for confirmation or lack thereof as well as the unemployment rate adjustment. Just as important, have a peek at the ISM Non-manufacturing employment subindex, which has consistently registered ugly readings since the crisis hit in late 2008.
Looking ahead
We are all aware by now of the strong surge in the US manufacturing sector, as the US ISM has surged to well above 50 for the last several months. But the dominant services sector of the economy has shown little improvement, and continues to languish around the breakeven market of 50. This is an important reading on where we stand, though one has to wonder if we will get a better reading in March and April as we have had extreme weather events in large portions of the most heavily populated regions of the US that may have slowed economic activity. Watch out for the Fed's Beige Book later in the US session.
We are all aware by now of the strong surge in the US manufacturing sector, as the US ISM has surged to well above 50 for the last several months. But the dominant services sector of the economy has shown little improvement, and continues to languish around the breakeven market of 50. This is an important reading on where we stand, though one has to wonder if we will get a better reading in March and April as we have had extreme weather events in large portions of the most heavily populated regions of the US that may have slowed economic activity. Watch out for the Fed's Beige Book later in the US session.
Euro posted a significant technical reversal yesterday against the greenback, AUD, CAD, and JPY, to a lesser extent. We may be witnessing the beginnings of a short squeeze on Euro bears here in the near term. How high could such a squeeze take us?
Economic Data Highlights
- US Feb. Total Domestic Vehicle Sales out at 7.91M vs. 8.0M expected
- Feb. Australia AiG Performance of Service Industries out at 48.3 vs. 47.4 in Jan.
- UK Feb. Nationwide Consumer Confidence rose to 80 vs. 73 expected and 74 in Jan.
- Australia Q4 GDP out at +0.9% QoQ and +2.7% YoY vs. +0.9/+2.4% expected, respectively
- Germany Jan. Retail Sales out at 0.0% MoM and -3.4% YoY vs. -0.6/-1.1% expected, respectively
- Sweden Q4 Current Account out at 40.8B vs. 54B in Q3
- UK Feb. PMI Services out at 58.4 vs. 55.0 expected and 54.5 in Jan.
- EuroZone Jan. Retail Sales out at -0.3% MoM and -1.3% YoY vs. -0.3/-1.6% expected, respectively
- US Feb. Challenger Job Cuts fell -77.4% YoY vs. -70.4% in Jan.
- US Feb. ADP Employment Change out at -20k as expected
Upcoming Economic Calendar Highlights
- US Feb. ISM Non-manufacturing (1500)
- US Weekly DOE Crude Oil and Product Inventories (1530)
- US Fed's Lockhart to Speak (1800)
- US Fed's Beige Book (1900)
- Japan Q4 Capital Spending (2350)
- Australia Jan. Trade Balance (0030)
- Japan BoJ's Noda to Speak (0130)
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