FX Closing Note: Was that the end of the squeeze?

John J. Hardy, FX Consultant, Saxo Bank

FX Closing Note: Was that the end of the squeeze?

The risk rally today in the wake of this weekend's moves by China on its yuan policy looks increasingly like it may have been a blow-off rally for the short term, as the equity and risk rally starting in Asia and following through in Europe turned into a vicious rout in the US, though we had enough of an "algo-bounce" to remind bears how wary we need to remain of this artificial, and perhaps even malevolent, market. The other interesting development on the day was the swoon in gold, which remains close to its low on the day after reversing thirty dollars lower from a record high earlier in the day on news of a strong build in Saudi gold reserves. All who believe that the Saudi central bank is a good market timer, raise your hand.

Reversal City
So after the day's action we have reversal city, with compelling bullish reversals for the USD and to a lesser extent for the JPY vs. a number of other currencies. EURUSD and GBPUSD reversed strongly after attempts at new highs for the cycle. That EURUSD high level overnight at 1.2500 was awfully symbolic.
USDCAD also posted a reversal on the day after new lows since mid-May. The Bank of Canada was out with extremely cautious rhetoric today on the implications of that should give the CAD bulls more pause than we have seen thus fa r(of course, some of the risks to Canada are from household indebtedness being the worst in the OECD - one of the reasons the market is looking for the BoC to hike - but is a known future catastrophe bullish for a country's currency because you think that the BoC will have to hike in order to ensure that the crash will come sooner rather than later?). At the same time, we have endless articles out praising the virtues of Canada at the moment. This is a contrarian's dream. Next step for USDCAD is the 55-day moving average up at around 1.0280 now that we have a bullish candle reversal, but to get a much better structural reversal and sign that USDCAD is turning back around, a move and close above the 200-day is worth a wait for more conviction. The swoon in gold prices should also be seen as CAD bearish.

Other technical action of note: EURGBP found resistance at the ideal 0.8400 level, and it makes sense to see GBP firming a bit today as risk aversion returned (and UK rates look less pathetic as rates fall elsewhere). Still, GBPUSD turned tail today after trying and failing above the 55-day moving average. Lets' see if this is the top for now there. Oddly, the yuan news is still seeing the AUD significantly stronger in places, even if AUDUSD and AUDJPY corrected fairly sharply from the highs. AUDNOK burst to a new 13-year high and EURAUD trying close to the recent all-time low. If equities follow up to the downside in the days to come, we would expect the market to realize that it has played the AUD wrong and that risk appetite still dominates for that currency.

Looking ahead:
As we promised this morning, here is a look at the rest of this week's economic calendar highlights:

Tuesday

• Sweden May Unemployment Rate. This is Sweden's Unemployment Rate according to Statistics Sweden. It has been rising again - back towards the high of the cycle. Meanwhile, alternative surveys show the employment picture improving. Confusing, to say the least. SEK has moved back toward the stronger side of the range vs. the EUR on the recent risk appetite moves, and that key EURSEK pair will likely continue to track risk appetite from here, now that EURSEK just today broke to the lowest levels since pre-Lehman.
• Germany Jun. IFO Business Climate. If this survey doesn't disappoint after almost managing to maintain a near 2-year high in April, then we're not sure what can dent the optimism, which must be focusing on the benefits of the weak Euro for German exports rather than the growth implications of a political and banking crisis all across the EuroZone.
• Canada May Consumer Price Index - no inflation scares in Canada, where the government is looking more at the housing situation and overall growth in judging the need to raise rates. Still, the rhetoric from the BoC has turned extremely cautious of late.
• US May Existing Home Sales - is the consensus seriously looking for an increase from April when the home-buying incentive expired April 30? Apparently so, the question is why? The NAHB survey and building permits and housing starts fell off a cliff last month.
• US Weekly Consumer Confidence - we'll make note of this weekly survey when it breaks above -40 and holds there for more than two weeks. The last time it was above that level? April 2008. Prior to that month, it hadn't registered a sub minus 40 reading since the early 1990's, when Ross Perot was making political hay despite erratic behavior and hopeless political ineptitude. This will be an interesting mid-term election in November - just over four months from now.

Wednesday

• Germany/EuroZone Preliminary Jun. Services and Manufacturing PMI - These have yet to show any real slowing of momentum, but we have to imagine that this is the case soon with European banking at a standstill, as Meredith Whitney recently said.
• UK Bank of England Meeting Minutes - the bank clearly wants to keep rates low and will look through short term inflation figures
• UK CBI Distributive Trades - saw an ugly drop in May, which was at odds with BRC and official data. CBI data probably the best, however, so stay tuned.
• Norway Norges Bank Rate Decision - Norges Bank is on hold, considering the NOK's relatively strong levels vs. the Euro and very poor growth data out of Norway. The Norges Bank's only concern with low rates is likely the overheated housing market, which is a further risk going forward.
• Canada Apr. Retail Sales - looking for signs of a slowing consumer - especially after recent torrid increases in consumption in a country sporting the OECD's highest private debt level...
• US May New Homes Sales - see above on Existing Home Sales. Likely to come in very weak after tax incentive expiry at the end of April.
• US FOMC Rate Decision - expect something along the lines of "low rates forever unless conditions warrant otherwise". The Fed may actually need to focus more on downside risks this time around than it has in the past, though a minority of FOMC members is clamoring for rate increases despite near record low inflation and troubling new signs of a slowdown. Still, the May Fed Beige Book noted improved economic activity in all 12 Federal Reserve districts, though it said improvement was modest.

Thursday

• New Zealand GDP - the RBNZ recently hiked for the first time for the cycle, but confidence is beginning to slow and there are signs of a tired consumer.
• US May Durable Goods Orders - notably volatile data series, fell last time, but only after March's largest rise since 2005 ex Autos.
• US Weekly Jobless Claims - talk that Gulf oil spill will is beginning to have an effect here, so optimists will try to look through that.

Friday

• New Zealand Trade Balance - not seasonally adjusted data - usually falls from this point until the late fall period. Still, the surplus has been impressive this spring.
• UK Bank of England Financial Stability Report - stable as long as the bond vigilantes are on the defensive!
• Japan May CPI - deflation, anyone? Remember the paradox of the carry trade - the spot rate of a currency in a country with deflation should be rising versus higher inflation countries.
• US Final Jun. University of Michigan Confidence - is the improvement in confidence behind us? According to the weekly survey, the improvement never got started...