FX Update: Risk falls out of bed to start the week.
Not surprisingly, Asia decided it did not like the very weak close in the US on Friday, and risk trades were taken to the cleaners from the get-go overnight, with EURUSD rushing to a new low below 1.2250 before rebounding and commodity currencies selling off viciously. The drop below the old 2008 low at 1.2330 obviously triggered stops.
AUDUSD almost touched its low during the May 6 US equity panic and NZDUSD traded below 0.7000 this morning for the first time since early April. That pair has not closed below that level since March 5. The JPY remains jumpy and unpredictable - at first outpacing the greenback's strength in Asia before USDJPY snapped back higher after a brief tease below last Friday's low. Again the question begs whether the cycle is changing for the Yen, and whether its relative weakness vs. the USD compared to historic behaviors (vis-à-vis US interest rates) has something to do with the fears of sovereign debt pressures down the road.
EuroZone woes
Trichet was out trying to talk up the need for a "quantum leap" in how Europe is governed, as he perhaps tries to shore up the tremendous loss of face he suffered after the recent capitulation on the bond-buying issue. Apparently, the BuBa's Weber, ECB's Stark, and Dutch CB head Wellink all voted against the decision for the ECB to buy debt. Debt spreads at the EuroZone periphery were marginally wider in today's trading.
Trichet was out trying to talk up the need for a "quantum leap" in how Europe is governed, as he perhaps tries to shore up the tremendous loss of face he suffered after the recent capitulation on the bond-buying issue. Apparently, the BuBa's Weber, ECB's Stark, and Dutch CB head Wellink all voted against the decision for the ECB to buy debt. Debt spreads at the EuroZone periphery were marginally wider in today's trading.
Chart: EURUSD
EURUSD trying to make a stand in early US hours as the ECB is out describing how many bonds it has purchased and how it plans to sterilize purchases. This rally comes after crossing to new lows since 2006 overnight. Momentum is not yet divergent, so we need to see a more emphatic squeeze higher to get more confirmation. Let's see where the pair is trading on the next move through 20 in the stochastics.1.2520 is the important local resistance.
EURUSD trying to make a stand in early US hours as the ECB is out describing how many bonds it has purchased and how it plans to sterilize purchases. This rally comes after crossing to new lows since 2006 overnight. Momentum is not yet divergent, so we need to see a more emphatic squeeze higher to get more confirmation. Let's see where the pair is trading on the next move through 20 in the stochastics.1.2520 is the important local resistance.
China continues to stumble
The Chinese Shanghai Composite Index closed close to a 12-month low and is now almost 18% lower from its early April highs and over 25% off its peak from mid-2009. Stories abound of the shocking effects of Chinese authorities aimed at stamping out real estate speculation. Sales activity has plummeted 50% in Beijing since local authorities restricted the number of apartments an individual could own at the end of April.Reports indicated that prices in the capital have risen as much as 100% in just a year. That kind of speculative frenzy could end in tears, and this is perhaps what the Chinese equity market is currently pricing in. A construction bust would crimp commodity demand for construction inputs, including copper, steel, and other base metals, and the most exposed currency to any drop in this kind of demand is, of course, the Aussie, which has been taking it on the chin of late and could continue to do so on this story as well as on general risk aversion.
The Chinese Shanghai Composite Index closed close to a 12-month low and is now almost 18% lower from its early April highs and over 25% off its peak from mid-2009. Stories abound of the shocking effects of Chinese authorities aimed at stamping out real estate speculation. Sales activity has plummeted 50% in Beijing since local authorities restricted the number of apartments an individual could own at the end of April.Reports indicated that prices in the capital have risen as much as 100% in just a year. That kind of speculative frenzy could end in tears, and this is perhaps what the Chinese equity market is currently pricing in. A construction bust would crimp commodity demand for construction inputs, including copper, steel, and other base metals, and the most exposed currency to any drop in this kind of demand is, of course, the Aussie, which has been taking it on the chin of late and could continue to do so on this story as well as on general risk aversion.
Labour's parting gift to the new government
The pound was weaker today on the an article from the Times (see article here) suggesting that Labour had hidden billions of pounds of spending commitments and that the public balance sheet may be in even worse condition than already known. Accusations from the new government suggest that Labour was spreading around as much money as possible to boost its chances in the election. This is fairly damning stuff and the new government has a tough task ahead of it.
The pound was weaker today on the an article from the Times (see article here) suggesting that Labour had hidden billions of pounds of spending commitments and that the public balance sheet may be in even worse condition than already known. Accusations from the new government suggest that Labour was spreading around as much money as possible to boost its chances in the election. This is fairly damning stuff and the new government has a tough task ahead of it.
Fading US Manufacturing bounce?
Today's US Empire Manufacturing data is the first manufacturing-related data point to suggest a deceleration in the inventory building rebound we have seen in US manufacturing since late last year. Let's wait for the other regional manufacturing surveys to roll in before we jump to any conclusions, but most of these are at unsustainably high levels, so we may see more disappointments in this data category for a few months, even if levels are expansionary.
Today's US Empire Manufacturing data is the first manufacturing-related data point to suggest a deceleration in the inventory building rebound we have seen in US manufacturing since late last year. Let's wait for the other regional manufacturing surveys to roll in before we jump to any conclusions, but most of these are at unsustainably high levels, so we may see more disappointments in this data category for a few months, even if levels are expansionary.
Looking ahead
Watch out for the SNB's Hildebrand, who is out speaking shortly. The market is clearly focusing on this 1.4000 area in EURCHF as the pair has traded virtually unchanged around that level for three days now and his rhetoric could be a trigger for more action in that pair. The US NAHB Housing Market survey is the most leading survey on housing in the US and this will be the first survey report since the expiration of the key tax incentives that were available for all home buyers until the end of April.
Watch out for the SNB's Hildebrand, who is out speaking shortly. The market is clearly focusing on this 1.4000 area in EURCHF as the pair has traded virtually unchanged around that level for three days now and his rhetoric could be a trigger for more action in that pair. The US NAHB Housing Market survey is the most leading survey on housing in the US and this will be the first survey report since the expiration of the key tax incentives that were available for all home buyers until the end of April.
Speculative short Euro positions continue to march to new highs. This is a field of dreams for contrarians - on a tactical basis looking for a squeeze, at least - but does anyone dare to step in here and offer the single currency some support? Standing aside may be the healthiest approach to the Euro - though the skew in risk reversals suggest some might be tempted to short downside volatility here and go long upside volatility. The bounce today back above the old 1.2330 low is rather interesting, and a strong close at these levels or higher might strike a bit of fear into the hearts of Euro bears, as it would create a bullish hammer formation.
Tonight's RBA Meeting Minutes
RBA Meeting Minutes - RBA rhetoric has downshifted of late - what signals will the RBA send - especially about its view of rates and the potential effect on the bubbly Australian housing market? Fed started hiking in mid-2004 and US housing market didn't top out until mid 2006. Can things possibly go that slowly in Australia as well, or is it on a more compressed time scale? The latter is certainly a risk as Australia fortunately doesn't have the "financial innovation" angle that got the US into so much trouble, as loans were extended to anyone with a pulse to feed the crazy sub-prime derivative machine.
RBA Meeting Minutes - RBA rhetoric has downshifted of late - what signals will the RBA send - especially about its view of rates and the potential effect on the bubbly Australian housing market? Fed started hiking in mid-2004 and US housing market didn't top out until mid 2006. Can things possibly go that slowly in Australia as well, or is it on a more compressed time scale? The latter is certainly a risk as Australia fortunately doesn't have the "financial innovation" angle that got the US into so much trouble, as loans were extended to anyone with a pulse to feed the crazy sub-prime derivative machine.
As always, stay very careful out there.
Economic Data Highlights
- New Zealand Apr. Performance of Services Index out at 54.1 vs. 56.7 in Mar.
- UK May Rightmove House Prices rose 0.7% MoM and 4.3% YoY vs. 6.0% YoY in Apr.
- Japan Mar. Machine Orders rose 5.4% MoM vs. 6.3% expected
- Japan Apr. Domestic CGPI out at +0.4% MoM and -0.2% YoY vs. +0.3%/-0.3% expected, respectively
- UK May CBI Industrial Trends Total Orders rose to -18 vs. -36 in April
- US May Empire Manufacturing out at 19.11 vs. 30 expected and 31.86 in Apr.
- US Mar. Net Long-term TIC Flows out at $140.5B vs. $50.B expected and $47.1B in Feb.
- US Mar. Total Net TIC Flows out at $10.5B vs. $9.7B in Feb.
Upcoming Economic Calendar Highlights
- Switzerland SNB's Hildebrand to Speak (1600)
- US May NAHB Housing Market Index (1700)
- New Zealand Q1 Producer Prices (2245)
- Australia RBA May Meeting Minutes (0130)
- Japan Apr. Consumer Confidence (0500)
- Japan Apr. Nationwide Department Store Sales (0530)
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