John J. Hardy, FX Consultant, Saxo Bank
FX Update: AUD falls despite Rudd exit
AUD drops on new PM
Australia's PM Rudd made a quick exit after it became clear that he had lost his party's confidence, and the new PM Gillard has promised to review the mining tax - though it seems less certain from the news flow today whether the tax faces elimination or simply new terms. Of course, she swept to power suddenly at least partly over the controversy of this mining tax, so its terms will likely become far more lenient on the mining industry. But remember before we get too bullish on the Aussie implications, that the new PM also gained power because Rudd abandoned plans to implement a carbon trading scheme. Australians are, after all, a bit more prone to believe in global warming/climate change propaganda since they have experienced dramatic droughts and other climatic events in recent years. It's more than a bit ironic for the world's biggest exporter of raw carbon per capita in the form of coal to want to implement this kind of thing with its currency having recently soared to all time highs. Aussie adjusted lower as it should have on the risk aversion evident elsewhere and on shrinking interest rate spreads. Still, a more neutral level for the currency given current circumstances is probably a good deal lower still (as we discussed in yesterday's post where we looked at AUDUSD vs. US bond yields, for example.)
Australia's PM Rudd made a quick exit after it became clear that he had lost his party's confidence, and the new PM Gillard has promised to review the mining tax - though it seems less certain from the news flow today whether the tax faces elimination or simply new terms. Of course, she swept to power suddenly at least partly over the controversy of this mining tax, so its terms will likely become far more lenient on the mining industry. But remember before we get too bullish on the Aussie implications, that the new PM also gained power because Rudd abandoned plans to implement a carbon trading scheme. Australians are, after all, a bit more prone to believe in global warming/climate change propaganda since they have experienced dramatic droughts and other climatic events in recent years. It's more than a bit ironic for the world's biggest exporter of raw carbon per capita in the form of coal to want to implement this kind of thing with its currency having recently soared to all time highs. Aussie adjusted lower as it should have on the risk aversion evident elsewhere and on shrinking interest rate spreads. Still, a more neutral level for the currency given current circumstances is probably a good deal lower still (as we discussed in yesterday's post where we looked at AUDUSD vs. US bond yields, for example.)
US Economic Data
The recent ugly streak in US data has the market expecting ugly data, so today's relatively in-line data looked downright positive and saw risk trying to make a bit of recovery at the open of US equity trading. But there should be little impact from these numbers specifically after a tremendous dark cloud created by the housing data and ugly retail sales data of late. More important data awaits next week, when we have the ISM report and the June employment numbers, which are unlikely to show improvement after the constant stream of 450+ jobless claims data and no census hiring to support the payrolls number next Friday.
The recent ugly streak in US data has the market expecting ugly data, so today's relatively in-line data looked downright positive and saw risk trying to make a bit of recovery at the open of US equity trading. But there should be little impact from these numbers specifically after a tremendous dark cloud created by the housing data and ugly retail sales data of late. More important data awaits next week, when we have the ISM report and the June employment numbers, which are unlikely to show improvement after the constant stream of 450+ jobless claims data and no census hiring to support the payrolls number next Friday.
Chart: EURGBP
The pair probed the lows for the cycle today, though it was unable to hold the new lows. With sovereign spreads improving within Europe a bit today (more on this below), the pair may have a harder time taking out new lows for the cycle. Also of interest is GBPUSD, which has grinded higher and had a look at 1.5000 in today's trade. That rally is looking a bit overambitious. These main GBP pairs may roll into a range trading environment.
The pair probed the lows for the cycle today, though it was unable to hold the new lows. With sovereign spreads improving within Europe a bit today (more on this below), the pair may have a harder time taking out new lows for the cycle. Also of interest is GBPUSD, which has grinded higher and had a look at 1.5000 in today's trade. That rally is looking a bit overambitious. These main GBP pairs may roll into a range trading environment.
Chart: USDCAD
USDCAD is pounding on the 200-day moving average as of this writing. A close above here on continued risk aversion could see it continue to rush higher to the top of the recent range and beyond. Carney yesterday said he was watching the loonie's strength and volatility. Speculators and central banks have been completely gaga on this currency for all of the obvious fundamental reasons, but none of those reasons will hold water if the global outlook sours, and crowded trades make for ugly squeeze situations, so if risk remains in the meat grinder in coming weeks, we could see this pair rush to 1.11+ in a hurry. The first key support is the Asian low at the 1.0375 daily pivot.
USDCAD is pounding on the 200-day moving average as of this writing. A close above here on continued risk aversion could see it continue to rush higher to the top of the recent range and beyond. Carney yesterday said he was watching the loonie's strength and volatility. Speculators and central banks have been completely gaga on this currency for all of the obvious fundamental reasons, but none of those reasons will hold water if the global outlook sours, and crowded trades make for ugly squeeze situations, so if risk remains in the meat grinder in coming weeks, we could see this pair rush to 1.11+ in a hurry. The first key support is the Asian low at the 1.0375 daily pivot.
Looking ahead:
The outlook for risk remains negative - the CEE currencies are sharply weaker vs. the Euro in today's trading, a sign that risk is being taken off in EM and in EM FX. EM spreads closed wider yet again yesterday, and corporate credit and junk bond spreads are also looking shaky in recent days. We've also got a strong surge in the VIX. Key benchmarks in FX land for whether the keel is tipping for another rush lower in risk aversion include the 200-day moving average in USDCAD around current levels (1.0430) and the 89.00 level in USDJPY, which was the previous low when equities put in their lows in May. One interesting thing to note on the risk front is that EuroZone spreads don't seem to be the cause of the more general risk aversion, as Spanish and Italian sovereign spreads are actually tighter today. This could give the likes of EURCAD and EURAUD significant upside if the risk aversion trade remains on elsewhere.
The outlook for risk remains negative - the CEE currencies are sharply weaker vs. the Euro in today's trading, a sign that risk is being taken off in EM and in EM FX. EM spreads closed wider yet again yesterday, and corporate credit and junk bond spreads are also looking shaky in recent days. We've also got a strong surge in the VIX. Key benchmarks in FX land for whether the keel is tipping for another rush lower in risk aversion include the 200-day moving average in USDCAD around current levels (1.0430) and the 89.00 level in USDJPY, which was the previous low when equities put in their lows in May. One interesting thing to note on the risk front is that EuroZone spreads don't seem to be the cause of the more general risk aversion, as Spanish and Italian sovereign spreads are actually tighter today. This could give the likes of EURCAD and EURAUD significant upside if the risk aversion trade remains on elsewhere.
Today we also see the results of the 7-year US treasury auction as the 10-year US yield benchmark is down probing its lowest levels in a year just above 3.00%. Tomorrow's economic calendar is largely devoid of interest, with only the final University of Michigan confidence number on tap.
Economic Data Highlights
- New Zealand Q1 GDP rose +0.6% QoQ and 1.9% YoY as expected
- Japan May Adjusted Merchandise Trade Balance out at ¥416.1B vs. ¥627B expected and ¥508B in Apr.
- Australia Q2 Westpac-ACCI Survey of Industrial Trends fell to 56.6 vs. 57.0 in Q1
- EuroZone Apr. Industrial New Orders rose +0.9% MoM vs. +1.6% expected
- US May Durable Goods Orders fell -1.1% MoM and rose +0.9% MoM ex Transportation vs. -1.4%/+1.0% expected, respectively
- US Weekly Initial Jobless Claims out at 457k vs. 463k expected and 476k last week
- US Weekly Continuing Claims out at 4548k vs. 4550k expected and 4593k last week
Upcoming Economic Calendar Highlights
- New Zealand May Trade Balance (2245)
- UK BoE releases Financial Stability Report (2301)
- Japan Jun. Tokyo CPI and May National CPI (2330)
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