FX Closing Note: Financial reform relief boosts risk trades

John J. Hardy, FX Consultant, Saxo Bank

FX Closing Note: Financial reform relief boosts risk trades

Odd moves today and odd data. It is very difficult to fathom the University of Michigan data, which showed the strongest level for confidence in the survey since 8 months before the Lehman bankruptcy despite the weekly ABC survey continuing to show confidence mired in recessionary depths. A Zerohedge blog post rains cynicism on the data point and lists all of the reasons why this confidence reading looks fishy. We're allergic to conspiracy theories, but the data does look strange in light of the daily drumbeat of oil spill news and its mounting negative effect on Obama's popularity, as well as relatively ugly equity markets over the past month and signs that housing and consumption are hitting the skids. Let's see if next Tuesday's Conference Board confidence number for June matches the increase we have seen in the Michigan data.

It's hard to take anything away from today's market moves, as it seems the market doesn't want to commit directionally ahead of this weekend's G20 meeting, though it was interesting to note the market's warm embrace of the US financial reform bill as US financial stocks rallied strongly on the day. Worse was apparently feared, but the weekend's G-20 meeting is likely to remind us that not only the US is tightening the rules for banks. The rest of the world is increasingly moving this way as well, as the recent UK moves show. The next target for the major powers could be offshoring, a significant further risk for the financial industry - and therefore a risk for risk as well. Otherwise, we have no specific expectations for this G20, the most important subject on our radar being the sharpness of any anti-China rhetoric after such a blatant political ploy from the Chinese regime ahead of this weekend's meeting. (see Krugman's column in the NY Times on the yuan as well for one perspective.)

Regardless of what is moving the market in today's trading, moves like the dip in USDCAD and snapback rally in AUDUSD do not at all match the goings on in interest rates, where the market continues to unwind forward expectations. BoC expectations for a year from now just hit a new low for the month and RBA expectations are also sharply lower over the last few days. This looks fishy, along with the current environment in which USDJPY stays lower while the commodity currencies rally. One of the market moves out there is the right one and the other is wrong.  CAD traders might be focusing on oil prices because of the potential for a hurricane disrupting Gulf of Mexico oil supply and hampering the oil spill stoppage efforts - but we've been through that drill before. As for AUD - it appears AUD traders are focused more on the rallies in financial stocks and copper at the moment, both of which surged today. 

Chart: AUDUSD and rate expectations
Looking at the last couple of months of data, it is interesting to note that the forward rate expectations are now much closer to where they were when AUDUSD was trading at 0.8100 - though there are, of course, other aspects to the picture, including a new surge in copper prices, dark clouds gathering in the US economic data, the Chinese "reval" giving Aussie a boost, and the new Australia PM's review of Rudd's overly burdensome mining tax. 

 Looking ahead

The USD remains extremely weak technically on the close today. EURUSD snapped back from a test of support, GBPUSD bounced strongly after touching the critical 55-day moving average, and USDCHF headed to a new low. AUDUSD posted a strong reversal, etc. If this weekend's G-20 events can't give the greenback a strong upswing on Monday, the retrenchment could deepen. Next week's calendar features the US ISM manufacturing data and the US employment data for June, which looks to be rather underwhelming judging from recent data trends. We'll look at week's calendar on Monday.

In the meantime, have a great weekend and stay careful out there.