FX Update: When does this market show some conviction?
An odd session overnight, as a relatively quiet Asian session yielded to a European session in which a very weak German ZEW reading was met with a rather large sell-off in Bunds (huh?), suggesting a rather strange response mechanism there – and cause for consideration as we discuss below. A look at the sovereign spreads within Europe showed a bit of divergence, with the spread to Italy actually tightening, while yesterday's Greece downgrade is seeing spreads to Greece widen even further, and Portuguese and Spanish spreads following suit. Spanish banks outside of the very largest internationals have largely been cut off from the interbank lending market. This is a huge risk to the Spanish economy (where left unattended could easily descend into a outright sovereign default – though we know that won’t happen in the shorter term as the bailout mentality continues to reign) and microcosm of the situation prevailing around the Lehman crisis. Germany has said that the EU mechanism is ready in the event Spain needs a rescue, though plans of such a rescue have been denied by Spain.
Corporate Bond issuance outside the EuroZone
A very interesting article from Bloomberg discusses how international corporations are looking outside the EuroZone to borrow money for corporate bond sales, with the Canadian dollar and Swiss francs now making up a record share of global bond sales - with non USD and EUR borrowing about twice as high as a percentage of total issuance of what it was a year ago. This helps explain some of the additional pressure on the likes of EURCAD and EURCHF in the recent cycle outside of outright speculation.
A very interesting article from Bloomberg discusses how international corporations are looking outside the EuroZone to borrow money for corporate bond sales, with the Canadian dollar and Swiss francs now making up a record share of global bond sales - with non USD and EUR borrowing about twice as high as a percentage of total issuance of what it was a year ago. This helps explain some of the additional pressure on the likes of EURCAD and EURCHF in the recent cycle outside of outright speculation.
Bank of Japan
The BOJ kept rates at 0.1% in a unanimous decision with a pledge to maintain very easy monetary conditions. The assessment of the economy was kept unchanged in that it is starting to recover moderately and likely to be on a recovery trend. The BOJ also announced details of a new loan scheme aimed at redirecting funds to industries with growth potential. The scheme will have ¥3 trillion at its disposal and loans will start flowing from August with banks able to apply once a quarter until March 2012. The Bank stressed the importance of maintaining fiscal credibility and the market reward the JPY with a slight strengthening versus the greenback despite a relatively risk-positive environment heading ahead of the US open.
The BOJ kept rates at 0.1% in a unanimous decision with a pledge to maintain very easy monetary conditions. The assessment of the economy was kept unchanged in that it is starting to recover moderately and likely to be on a recovery trend. The BOJ also announced details of a new loan scheme aimed at redirecting funds to industries with growth potential. The scheme will have ¥3 trillion at its disposal and loans will start flowing from August with banks able to apply once a quarter until March 2012. The Bank stressed the importance of maintaining fiscal credibility and the market reward the JPY with a slight strengthening versus the greenback despite a relatively risk-positive environment heading ahead of the US open.
Pound weaker
The pound was weaker on the UK inflation data release today as the RPI came in only slightly above expectations, but the core CPI scraped in just below 3.0% as expected, while the headline CPI was slightly lower than expected. The coming few months are critical for judging whether the BoE is correct in judging that it can remain complacent on inflation. The year-on-year comparisons suggest that it may be another couple of months before we can expect a sharper drop in prices, which will be aided by the stronger pound of recent months as well.
The pound was weaker on the UK inflation data release today as the RPI came in only slightly above expectations, but the core CPI scraped in just below 3.0% as expected, while the headline CPI was slightly lower than expected. The coming few months are critical for judging whether the BoE is correct in judging that it can remain complacent on inflation. The year-on-year comparisons suggest that it may be another couple of months before we can expect a sharper drop in prices, which will be aided by the stronger pound of recent months as well.
RBA Minutes
The RBA minutes confirmed the market's initial reading of the RBA's more cautious outlook from its June 1 meeting, as it noted the global growth risks from the situation in Europe, claimed that the AUD drop had been "orderly", continue to call lending rates in Australia "average", and noted that buoyancy in housing may be easing. It also touted its "flexibility". Australia STIRs were up a few points on the session - lending no real fundamental support to the AUDUSD rally off the lows in early Europe, which must be credited to an attempted comeback in risk appetite instead. Also in Asia, Deputy Governor Battellino said that the European situation was "quite worrying", but also noted that the Australia savings rate is "very good" and that household finances are in "good shape". Considering Australia's extreme levels of private indebtedness and vastly overpriced housing and the risks to the economy if the speculative boom in housing were to turn to bust, we're not sure why he was making these comments.
The RBA minutes confirmed the market's initial reading of the RBA's more cautious outlook from its June 1 meeting, as it noted the global growth risks from the situation in Europe, claimed that the AUD drop had been "orderly", continue to call lending rates in Australia "average", and noted that buoyancy in housing may be easing. It also touted its "flexibility". Australia STIRs were up a few points on the session - lending no real fundamental support to the AUDUSD rally off the lows in early Europe, which must be credited to an attempted comeback in risk appetite instead. Also in Asia, Deputy Governor Battellino said that the European situation was "quite worrying", but also noted that the Australia savings rate is "very good" and that household finances are in "good shape". Considering Australia's extreme levels of private indebtedness and vastly overpriced housing and the risks to the economy if the speculative boom in housing were to turn to bust, we're not sure why he was making these comments.
Looking ahead
The rise in bund yields today is the most interesting development in markets here and bears watching, particularly as the move has come independent of bond markets elsewhere and because it comes on the day after which Greece receives a sharp downgrade to junk status. This would seem to put upside pressure on the Euro, unless the move is about a sudden lack of faith in German/all of EuroZone, rather than representative of an unwinding of sovereign spread bets (doubtful). But let's see if EURUSD can push above the 1.2300/30 resistance area - a break of that area could lead to a squeeze to the 1.25-1.2800 zone. Elsewhere, watch the critical USDJPY cross as the 200-day moving average approaches once again (now around 90.90.).
The rise in bund yields today is the most interesting development in markets here and bears watching, particularly as the move has come independent of bond markets elsewhere and because it comes on the day after which Greece receives a sharp downgrade to junk status. This would seem to put upside pressure on the Euro, unless the move is about a sudden lack of faith in German/all of EuroZone, rather than representative of an unwinding of sovereign spread bets (doubtful). But let's see if EURUSD can push above the 1.2300/30 resistance area - a break of that area could lead to a squeeze to the 1.25-1.2800 zone. Elsewhere, watch the critical USDJPY cross as the 200-day moving average approaches once again (now around 90.90.).
In the commodity currencies, USDCAD posted a reversal that was largely just a mirror image of the reversal in equities, but the technical situation is interesting and we should continue to watch the 55-day moving average on the close - currently around 1.0270. Yesterday's low at 1.0225 is an area with lots of past history as well.
Yesterday, we listed all of the factors that continue to point south for risk, but let's see how the critical lines in the sand hold up in today's trade. Later today, we have the US NAHB survey for June. This survey has a habit of leading the housing starts and other housing industry numbers and very oddly showed an increase last month despite the April 30 expiration of US home-buying incentives. After the US close, we have the weekly ABC consumer confidence - again perched close to the high of the very depressed longer term range. In Asia, we have a look at Australian Q1 dwelling starts, and the BoJ Monthly report.
Stay careful out there.
Economic Data Highlights
- New Zealand May REINZ House Sales fell -17.2% YoY vs. -16.2% in Apr.
- New Zealand REINZ House Price Index fell -1.4% MoM vs. -0.4% in Apr.
- UK May RICS House Price Balance out at 22% vs. 15% expected and 19% in Apr.
- New Zealand May Non-resident Bond Holdings were 64.1% vs. 63.2% in Apr.
- Japan BoJ Target Rate left unchanged at 0.10% as expected
- Norway May Trade Balance out at 26.6B vs. 27.2B in Apr.
- UK May CPI out at +0.2% MoM and +3.4% YoY vs. +0.4%/+3.5% expected, respectively, and vs. +3.7% YoY in Apr.
- UK May Core CPI out at +2.9% YoY as expected and vs. 3.1% YoY in Apr.
- UK May RPI out at +0.4% MoM and +5.1% YoY vs. +0.3%/+5.0% expected, respectively and vs. +5.3% YoY in Apr.
- UK Apr. DCLG UK House Prices rose 10.1% YoY vs. 10.0% expected and 9.7% in May
- Germany Jun. ZEW Survey out at 28.7 vs. 42.0 expected and 45.8 in May
- EuroZone Apr. Trade Balance out at 1.4B vs. 1.5B expected and 0B in Mar.
- EuroZone Q1 Employment out at 0.0% QoQ and -1.2% YoY
- Canada Q1 Labor Productivity rose +0.7% QoQ vs. 1.2% expected
- Canada Apr. Manufacturing Sales rose +0.2% MoM vs. +0.3% expected
- US May Import Price Index fell -0.6% MoM and rose +8.6% YoY vs. -1.2%/+7.9% expected, respectively, and vs. 11.2% YoY in Apr.
- US Jun. Empire Manufacturing out at 19.57 vs. 20 expected and 19.11 in May
- US Apr. Net Long-term TIC Flows out at +$83.0B vs. +$70B expected and $140.5B in Mar.
- US Apr. Total Net TIC Flows out at $15.0B vs. $26.0B in Mar.
Upcoming Economic Calendar Highlights
- US Jun. NAHB Housing Market Index (1400)
- US Weekly API Crude Oil and Product Inventories (2030)
- US Weekly ABC Consumer Confidence (2100)
- UK May Nationwide Consumer Confidence (2301)
- Australia Q1 Dwelling Starts (0130)
- Japan BoJ Monthly Report (0500)
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