FX Update: Commodity currencies at center of risk meltdown
Some of the pressure on the Euro has eased up since yesterday, as the heavy market positioning coming into the volatility of the last few days was heavily long the commodity currencies, not only against the USD but also against the EUR and JPY, as the "weak G-3" theme we identified previously and in our monthly reports, has come under brutal fire. So EURAUD, a pair that we have been focusing on for a couple of weeks now, absolutely exploded yesterday on the combination of a stabilizing Euro while the overstretched positioning in Aussie continues to unwind in this environment of merciless risk aversion. it seems that all of the banks are now swinging around to the view that the AUD should fall, now that it has fallen 1000 pips. Fresh shorts may feel like they are late to the game, but once moves like this get going, their magnitude can be tremendous, even if the time horizon will likely be very compressed (as has been the case in risk meltdowns of markets past).
The basic risk barometer, the US S&P500, is testing below its 200-day moving average ahead of the opening of trade in New York. That level is around 1102 on the cash and 1096 on the June future. If the average is unable to reattain this level into the close (its importance doubly underlined by the recent support found there after the May 6 blow-up), then the meltdown in risk may have yet to find a bottom. 1090.75 in that June future was the "real low" after the blowup. For perspective, AUDUSD bottomed at 0.8800 when the S&P was testing that 1090.75 the last time, and is trading below 0.8300 as of this writing, just showing how late FX has been to this "anti-party" of risk.
RBA and AUD
The RBA was out overnight with some relatively stern warnings on the risk of the housing bubble and its potential ill effects on borrowers, saying that a speculative boom is not desirable and that borrowers can't rely on capital gains to service debt. It also noted that the population is growing faster than available housing. So clearly, the housing bubble is in focus for the RBA and has been a key reason for their front-loading the removal of accommodation, since so much of the mortgage debt in Australia is financed with floating rates. The RBA also noted that the effect of the mining boom in Australia is "building." At the same time, the RBA noted that consumer spending has been "quite subdued", and that monetary policy is "well placed" for the present. This suggests little pressure for the RBA to move at the next meeting or two and, given the present risk averse environment and this rhetoric, it is not surprising that the market has ratcheted its year-forward expectations all the way down to a mere +17 bps at present from as much as +70 bps in the immediate wake of the May 4 rate hike. AUD has been the most heavily punished of the G-10 currencies over the last 28 hours.
The RBA was out overnight with some relatively stern warnings on the risk of the housing bubble and its potential ill effects on borrowers, saying that a speculative boom is not desirable and that borrowers can't rely on capital gains to service debt. It also noted that the population is growing faster than available housing. So clearly, the housing bubble is in focus for the RBA and has been a key reason for their front-loading the removal of accommodation, since so much of the mortgage debt in Australia is financed with floating rates. The RBA also noted that the effect of the mining boom in Australia is "building." At the same time, the RBA noted that consumer spending has been "quite subdued", and that monetary policy is "well placed" for the present. This suggests little pressure for the RBA to move at the next meeting or two and, given the present risk averse environment and this rhetoric, it is not surprising that the market has ratcheted its year-forward expectations all the way down to a mere +17 bps at present from as much as +70 bps in the immediate wake of the May 4 rate hike. AUD has been the most heavily punished of the G-10 currencies over the last 28 hours.
Chart: EURAUD
EURAUD has spiked higher over the last few days as the squeeze has hit the market's heavily short EURAUD positioning. The pair has now wiped out more than a month's losses in a few short days and the upside pressure could continue as long as this meltdown in general market confidence remains in effect. The German IFO tomorrow is the next key event risk for the pair.
EURAUD has spiked higher over the last few days as the squeeze has hit the market's heavily short EURAUD positioning. The pair has now wiped out more than a month's losses in a few short days and the upside pressure could continue as long as this meltdown in general market confidence remains in effect. The German IFO tomorrow is the next key event risk for the pair.
Euro - nothing to like, but...
The Euro has stabilized remarkably over the last 24 hours, despite the "final straw" of the German ban on shorting of all kinds of instruments (which should be considered extremely Euro negative) as market positioning may finally be bumping up against the red zone and bad news is seeing diminishing returns. There is nothing at all to like about the single currency, but the contrarians out there may just see a squeeze here in the short term - even in EURUSD, though as long as the risk meltdown is under way, the EUR/commodity currency & EM trades will likely see the most volatility. NOK was absolutely hammered on the desperate fall in oil prices and a negative (!) GDP reading out of Norway.
The Euro has stabilized remarkably over the last 24 hours, despite the "final straw" of the German ban on shorting of all kinds of instruments (which should be considered extremely Euro negative) as market positioning may finally be bumping up against the red zone and bad news is seeing diminishing returns. There is nothing at all to like about the single currency, but the contrarians out there may just see a squeeze here in the short term - even in EURUSD, though as long as the risk meltdown is under way, the EUR/commodity currency & EM trades will likely see the most volatility. NOK was absolutely hammered on the desperate fall in oil prices and a negative (!) GDP reading out of Norway.
Market celebrates NZ tax cuts
While the market was punishing the Aussie for the RBA's relatively dovish words and on market positioning, the NZD got a boost overnight as the government announced a sales tax increase and income tax decrease to encourage a more balanced current account and more savings. The market greeted this enthusiastically, with AUDNZD selling off particularly sharply, even if NZD couldn't stay stronger vs. the suddenly mighty G-3 due to all of the risk aversion. New Zealand is still dealing with an “unpopped” housing bubble, but the government is making the right kinds of decisions. The short AUDNZD trade may continue to show promise for another year or more.
While the market was punishing the Aussie for the RBA's relatively dovish words and on market positioning, the NZD got a boost overnight as the government announced a sales tax increase and income tax decrease to encourage a more balanced current account and more savings. The market greeted this enthusiastically, with AUDNZD selling off particularly sharply, even if NZD couldn't stay stronger vs. the suddenly mighty G-3 due to all of the risk aversion. New Zealand is still dealing with an “unpopped” housing bubble, but the government is making the right kinds of decisions. The short AUDNZD trade may continue to show promise for another year or more.
US data
The FOMC minutes from the FOMC meeting of three weeks ago released yesterday looked especially out of date considering the recent turmoil, and showed lots of back and forth and mixed views on when and whether the Fed should start selling mortgage assets vs. hiking rates. All very academic at the moment. As if sentiment wasn't bad enough, the more or less positive US economic data environment of the last week was spoiled by today's very high jobless claims, though the seasonality adjustments at this time of the year are fairly radical (the May period generally sees the fewest layoffs seasonally and the absolute number of claims has hardly gone anywhere the last three weeks).
The FOMC minutes from the FOMC meeting of three weeks ago released yesterday looked especially out of date considering the recent turmoil, and showed lots of back and forth and mixed views on when and whether the Fed should start selling mortgage assets vs. hiking rates. All very academic at the moment. As if sentiment wasn't bad enough, the more or less positive US economic data environment of the last week was spoiled by today's very high jobless claims, though the seasonality adjustments at this time of the year are fairly radical (the May period generally sees the fewest layoffs seasonally and the absolute number of claims has hardly gone anywhere the last three weeks).
Looking ahead
The market at present is driven purely by sentiment with old risk longs getting squeezed and new risk shorts taking advantage of their vulnerability, so it is difficult to talk up any single known calendar event in the near future that we can look for to provide a turning point in the action. As we have said previously, normally these moves play out very quickly once parabolic price action has come into play as it has. Since the fundamentals are nowhere near as alarming (as far as we can tell) as they were in the scary days of the post-Lehman bankruptcy, we assume that a short-term climax in the action (a trading low) is in the cards within the week.
The market at present is driven purely by sentiment with old risk longs getting squeezed and new risk shorts taking advantage of their vulnerability, so it is difficult to talk up any single known calendar event in the near future that we can look for to provide a turning point in the action. As we have said previously, normally these moves play out very quickly once parabolic price action has come into play as it has. Since the fundamentals are nowhere near as alarming (as far as we can tell) as they were in the scary days of the post-Lehman bankruptcy, we assume that a short-term climax in the action (a trading low) is in the cards within the week.
If we look over at the calendar, we note the Philly Fed out later today, as well as the US Leading Indicators for April, which are expected to show a strong contraction from very strong readings in previous months. Watch out for the Bank of Japan meeting tonight as Japanese officialdom can't be happy with the proceedings and powerful JPY rally (particularly EURJPY), though the bank has been divided on whether it should revert to new quantitative easing measures. The JPY is very strong, but it may sell-off particularly quickly if the bond market buying ever sees any relief as the response mechanism in JPY vs. interest rates seems weaker than in cycles past.
Otherwise, tomorrow sees the German IFO (perhaps strong due to the weak EUR rather than weak due to the Greece fears - we have no idea...except that it might serve as an excuse to squeeze EUR shorts even more if the reading is stronger than expected.) We also get the Canadian CPI numbers for April and Retail Sales for Mar. The US calendar is essentially empty.
Stay very careful out there and let's watch where the S&P500 closes on the day.
Economic Data Highlights
- Japan Q1 GDP out at +1.2% QoQ vs. 1.4% expected
- Japan Q1 GDP Deflator out at -3.0% YoY as expected
- Germany Apr. Producer Prices rose +0.8% MoM and +0.6% YoY vs. +0.6/+0.4% expected, respectively
- Norway Q1 GDP fell -0.1% QoQ vs. +0.2% expected
- UK Apr. Retail Sales ex Auto Fuel out at +0.1% MoM and +3.0% YoY vs. -0.1%/3.2% expected, respectively
- Switzerland May Credit Suisse ZEW Survey out at 40.5 vs. 53.4 in Apr.
- Canada Apr. Leading Indicators out at +0.9% MoM vs. +0.7% expected
- US Weekly Initial Jobless Claims out at 471k vs. 440k expected and 446k last week
- US Weekly Continuing Claims out at 4625k vs. 4605k expected and 4665k last week
Upcoming Economic Calendar Highlights
- US Apr. Leading Indicators (1400)
- US May Philadelphia Fed (1400)
- Switzerland SNB's Jordan to Speak (1400)
- EuroZone May Consumer Confidence (1400)
- US Fed's Tarullo to Testify (1800)
- New Zealand Apr. Credit Card Spending (0300)
- New Zealand May ANZ Consumer Confidence (0300)
- Japan BoJ Target Rate (time not given)
No comments:
Post a Comment