FX Update: JPY misbehaving again....
Risk fell out of bed to start a new month today, as the Euro stretched to new lows for the cycle versus the USD and GBP. The downside for the single currency was aggravated by the news of the resignation of Germany's president Koehler, as support for Chancellor Merkel seems to be quickly evaporating. New political polls show the chancellor's popular support is at a new low since 2006. This development was especially felt in the EURGBP cross, which plunged to its lowest level since December of 2008, below the key 0.8400 support. Some of the sterling support was also likely due to the apparent failure of the attempt by the UK's Prudential to take over AIA.
At the same time, the Wall Street Journal is out with an article today discussing tensions between the Bundesbank and the ECB about its buying of shaky sovereign debt. The article fails to make us understand the exact point of contention, but it is clear that Bundesbank-ECB tensions are running very high and generally feeds into the idea that a breakup of the EuroZone is a real and present danger. Sovereign debt spreads stretched a bit wider today as well, as the pressure seems to be piling on the Euro from every corner.
RBA no-hike and Rudd's Mining Tax drag Aussie lower
The Australia dollar weakened anew overnight after the RBA decided to not hike at this meeting. Most market participants expected the bank to stand pat on rates, and the additional downside for the Aussie more likely stemmed from general risk aversion and especially by PM Rudd's insistence that the government remains committed to going ahead with a special 40% mining tax, even if an agreement may take some time to hammer into place. A newspaper article just last week suggested that the government might be rethinking this mining tax, thus aggravating the consolidation in the Aussie from the lows, so this news serves as a shock for those hoping that a weakening government stance was afoot. The great irony will be if this tax arrives just as industrial metals prices collapse, which they have lately threatened to do on concern over China's growth (a slightly lower than expected Chinese manufacturing PMI for May was released overnight). A Chinese growth hiccup and collapsed mining industry would inevitably pop the Australia housing bubble (note the tremendous contraction in building approvals in April...) and we could see AUDUSD trading at 0.7000 within a half year in the worst case scenario. As far as actual moves in RBA expectations, the June '11 Bank Bill STIR traded a mere two points higher on the day.
The Australia dollar weakened anew overnight after the RBA decided to not hike at this meeting. Most market participants expected the bank to stand pat on rates, and the additional downside for the Aussie more likely stemmed from general risk aversion and especially by PM Rudd's insistence that the government remains committed to going ahead with a special 40% mining tax, even if an agreement may take some time to hammer into place. A newspaper article just last week suggested that the government might be rethinking this mining tax, thus aggravating the consolidation in the Aussie from the lows, so this news serves as a shock for those hoping that a weakening government stance was afoot. The great irony will be if this tax arrives just as industrial metals prices collapse, which they have lately threatened to do on concern over China's growth (a slightly lower than expected Chinese manufacturing PMI for May was released overnight). A Chinese growth hiccup and collapsed mining industry would inevitably pop the Australia housing bubble (note the tremendous contraction in building approvals in April...) and we could see AUDUSD trading at 0.7000 within a half year in the worst case scenario. As far as actual moves in RBA expectations, the June '11 Bank Bill STIR traded a mere two points higher on the day.
The JPY again....
The yen seems to be back to the inconsistent behavior is exhibited at the end of April, when USDJPY was rising while US long interest rates fell. Today's action so far is a microcosm of this behavior - we have seen a sharp rally in US treasuries, which at first pressured the USDJPY pair lower, but that sell-off has since been erased with a bounce back into the range. What gives? It is too early and the move has been too small to take this divergence too seriously at the moment, but we can't help but feel that something is afoot with the Japanese Yen. If it is able to work back below the 0.9060 area weekly pivot - also the low today, then we can ignore the renewed divergence here, but if the pair works back higher through the 91.50 area Ichimoku cloud resistance, then we have a key technical development on our hands and the potential for much higher levels. The latter would be especially interesting if it was to happen in the current strong bond market regime.
The yen seems to be back to the inconsistent behavior is exhibited at the end of April, when USDJPY was rising while US long interest rates fell. Today's action so far is a microcosm of this behavior - we have seen a sharp rally in US treasuries, which at first pressured the USDJPY pair lower, but that sell-off has since been erased with a bounce back into the range. What gives? It is too early and the move has been too small to take this divergence too seriously at the moment, but we can't help but feel that something is afoot with the Japanese Yen. If it is able to work back below the 0.9060 area weekly pivot - also the low today, then we can ignore the renewed divergence here, but if the pair works back higher through the 91.50 area Ichimoku cloud resistance, then we have a key technical development on our hands and the potential for much higher levels. The latter would be especially interesting if it was to happen in the current strong bond market regime.
Bank of Canada
The Bank of Canada raised rates 25 bps to 0.50% as widely expected, though there was some creeping doubt coming into today's decision due to the recent shaky sentiment in global markets. The bank decided to both go ahead with a face saving rate hike (because of the degree to which it had primed markets for today's move in recent moves) while at the same time warning that events in world markets - particularly the EuroZone crisis - are causing some worry and that further rate moves will need to be "weighed carefully". This rhetoric suggests that recent events have caught the bank by surprise and that it will take a very cautious stance from here on out. This leaves CAD to trade on general risk sentiment and energy prices, something that it has been doing of late anyway. The recent lows in USDCAD are important support for the pair. The reaction at the short end of the curve in the Canadian government bond market suggests that the pressure is firmly to the upside in USDCAD today.
The Bank of Canada raised rates 25 bps to 0.50% as widely expected, though there was some creeping doubt coming into today's decision due to the recent shaky sentiment in global markets. The bank decided to both go ahead with a face saving rate hike (because of the degree to which it had primed markets for today's move in recent moves) while at the same time warning that events in world markets - particularly the EuroZone crisis - are causing some worry and that further rate moves will need to be "weighed carefully". This rhetoric suggests that recent events have caught the bank by surprise and that it will take a very cautious stance from here on out. This leaves CAD to trade on general risk sentiment and energy prices, something that it has been doing of late anyway. The recent lows in USDCAD are important support for the pair. The reaction at the short end of the curve in the Canadian government bond market suggests that the pressure is firmly to the upside in USDCAD today.
Chart: USDCAD
The 200-day moving average never really fell convincingly despite yesterday's stronger than expected GDP figure from Canada, and today's guidance from the BoC keeps the pressure to the upside for the pair, particularly if the "risk off" trade remains the order of the day, as the pair has largely traded in total correlation with risk appetite. A sustained revival in risk here, on the other hand, could cap the upside and even see a renewed consolidation back into the old range.
The 200-day moving average never really fell convincingly despite yesterday's stronger than expected GDP figure from Canada, and today's guidance from the BoC keeps the pressure to the upside for the pair, particularly if the "risk off" trade remains the order of the day, as the pair has largely traded in total correlation with risk appetite. A sustained revival in risk here, on the other hand, could cap the upside and even see a renewed consolidation back into the old range.
Looking ahead
The data load this week is plenty heavy, with the US ISM Manufacturing data the first major data point of interest. We would suggest that last month or this month will mark the peak in the rate of expansion from the inventory restocking cycle. Tomorrow we get a look at US pending home sales for May, a measure of how much demand drop-off we may see in the post-tax incentive environment. To finish out a busy week from the US, we have the very important ISM Non-manufacturing data on Thursday (and the all-important employment component of that survey, which has yet to post a >50 reading since December of 2007 even as the overall index long ago passed above 50). Then we get the US employment report Friday, a real test of how much the market cares about data here, considering the heady payroll growth expectations of some +500k. Stay tuned and stay careful out there.
The data load this week is plenty heavy, with the US ISM Manufacturing data the first major data point of interest. We would suggest that last month or this month will mark the peak in the rate of expansion from the inventory restocking cycle. Tomorrow we get a look at US pending home sales for May, a measure of how much demand drop-off we may see in the post-tax incentive environment. To finish out a busy week from the US, we have the very important ISM Non-manufacturing data on Thursday (and the all-important employment component of that survey, which has yet to post a >50 reading since December of 2007 even as the overall index long ago passed above 50). Then we get the US employment report Friday, a real test of how much the market cares about data here, considering the heady payroll growth expectations of some +500k. Stay tuned and stay careful out there.
Economic Data Highlights
- Australia May AiG Performance of Manufacturing Index out at 56.3 vs. 59.8 in Apr.
- China May PMI Manufacturing out at 53.9 vs. 54.5 expected and 55.7 in Apr.
- Australia Apr. Retail Sales rose +0.6% MoM vs. +0.3% expected
- Australia Apr. Building Approvals out at -14.8% MoM and +21.3% YoY vs. -5.0%/+34.0% expected, respectively
- China May HSBC Manufacturing PMI out at 52.7 vs. 55.2 in Apr.
- Australia RBA left Cash Target unchanged at 4.50% as expected
- Switzerland Q1 GDP rose +0.4% QoQ vs. +0.7% expected
- Germany Apr. Retail Sales out at +1.0% MoM and -3.1% YoY vs. +1.0%/-0.7% expected, respectively
- Sweden May Swedbank PMI out at 66.0 vs. 62.3 expected and 64 in Apr.
- Norway May PMI out at 50.1 vs. 52.3 expected and 51.6 in Apr.
- Switzerland SVME PMI rose to 66.4 vs. 64.4 expected and 65.9 in Apr.
- Germany May Unemployment Change fell -45k vs. -17k expected
- Germany May Unemployment Rate fell to 7.7% vs. 7.8% expected and 7.8% in Apr.
- EuroZone Apr. Unemployment Rate rose to 10.1% vs. 10.0% expected and 10.0% in Mar.
- Canada BoC raised rate 25 bps to 0.50% as expected
Upcoming Economic Calendar Highlights
- US May ISM Manufacturing (1400)
- US Apr. Construction Spending (1400)
- US May Dallas Fed Manufacturing Activity (1430)
- US Weekly ABC Consumer Confidence (2100)
- Australia Q1 GDP (0130)
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