John J. Hardy, FX Consultant, Saxo Bank
FX Closing Note: Next week critical for EURUSD and AUD
More signs of ugliness in the US economy as the May Factory orders number showed a sharp contraction of -1.4% vs. a much smaller negative reading expected. As we discussed this morning, the US jobs report was far more negative than the headlines suggest, as the absolute number of people working actually declined, making a mockery of the drop in the headline rate - which actually should have gone higher. Another factor suggesting that the private payrolls growth - smaller than expected as it was - might actually have been even more negative as the "birth and death" adjustment magically added 147k assumed new jobs that may or may not be out there. So the statistical assumption was almost twice the magnitude of the result? Hmm.....
Chart: US Factory Orders
US Factory Orders are back higher, though still only to levels first seen in late 2005. The negative reading for this month was even larger than the deceleration in the manufacturing surveys suggested would be the case. The manufacturing surveys and factor outputs bear watching in coming couple of months for signs that this sector is faltering again.
US Factory Orders are back higher, though still only to levels first seen in late 2005. The negative reading for this month was even larger than the deceleration in the manufacturing surveys suggested would be the case. The manufacturing surveys and factor outputs bear watching in coming couple of months for signs that this sector is faltering again.
EURUSD status
Yesterday, we pointed out that EURUSD was being tugged higher by higher rates as shown in the 2-yr. swap spreads. An excellent post over at ftalphaville helps us understand that the situation and curious rise in Euro short yields relative to the rest of the world probably stems from roll-over of its enormous 12-month liquidity facility that has been taking place recently (this is likely in addition to a squeeze on market positioning we postulate). The effect from this rollover is likely soon behind us, since the rollover is essentially behind us. From here on out, it behooves us to watch the interest rate spreads and it is hard to imagine much upside at the front end of the curve for Europe vs. the US, where yields have dipped sharply on the onslaught of ugly and deflationary data. The combination of higher rates in Europe and the recent sharp unwinding of expectations for the few countries actually hiking their rates also helps us to understand the tremendous squeeze in the likes of EURAUD and EURCAD.
Yesterday, we pointed out that EURUSD was being tugged higher by higher rates as shown in the 2-yr. swap spreads. An excellent post over at ftalphaville helps us understand that the situation and curious rise in Euro short yields relative to the rest of the world probably stems from roll-over of its enormous 12-month liquidity facility that has been taking place recently (this is likely in addition to a squeeze on market positioning we postulate). The effect from this rollover is likely soon behind us, since the rollover is essentially behind us. From here on out, it behooves us to watch the interest rate spreads and it is hard to imagine much upside at the front end of the curve for Europe vs. the US, where yields have dipped sharply on the onslaught of ugly and deflationary data. The combination of higher rates in Europe and the recent sharp unwinding of expectations for the few countries actually hiking their rates also helps us to understand the tremendous squeeze in the likes of EURAUD and EURCAD.
As a side note, if we have a look at European risk markets, the Germans certainly aren't particularly thrilled with the EURUSD trading back above 1.2500. After almost surging to a new high for the cycle back in mid-June, the DAX has since tumbled over -7% and closed today below the critical 200-day moving average.
Chart: EURUSD the tease?
EURUSD closed very strongly yesterday, a rather convincing move above the 1.2500 resistance level. Today, the action took the pair above even the key 55-day moving average, which also provided resistance when EURUSD was attempting to move higher in April. This is an interesting level to watch in the coming week. The squeeze higher looks severely challenged on any move back below the 1.2400 level. The upside argument is in place if the break higher above 1.2500 holds - and many are pointing out the upside down head and shoulders-like technical formation with the neckline close to that level. Next week looks like an either/or set-up for the currency pair. We prefer the downside eventually, with plenty of uncertainty for the nearest term.
EURUSD closed very strongly yesterday, a rather convincing move above the 1.2500 resistance level. Today, the action took the pair above even the key 55-day moving average, which also provided resistance when EURUSD was attempting to move higher in April. This is an interesting level to watch in the coming week. The squeeze higher looks severely challenged on any move back below the 1.2400 level. The upside argument is in place if the break higher above 1.2500 holds - and many are pointing out the upside down head and shoulders-like technical formation with the neckline close to that level. Next week looks like an either/or set-up for the currency pair. We prefer the downside eventually, with plenty of uncertainty for the nearest term.
Looking ahead
This weekend is a three-day weekend for the US. The action gets going quickly in the new week with the Australia AiG services survey up on Monday in Asia (Sunday evening for North America) and the RBA on Tuesday. Next week looks critical for the fate of AUDUSD considering the recent bout of risk aversion and all of the data and RBA up next week for Australia.
This weekend is a three-day weekend for the US. The action gets going quickly in the new week with the Australia AiG services survey up on Monday in Asia (Sunday evening for North America) and the RBA on Tuesday. Next week looks critical for the fate of AUDUSD considering the recent bout of risk aversion and all of the data and RBA up next week for Australia.
Outlook for risk
While on a fundamental basis, we can find very little to celebrate, we do note that our measures of risk are showing no signs of accelerating to the downside at the moment. Junk bond spreads have improved sharply, in fact, and the VIX is divergent at this low from the markets previous low (less fear at the new price low, in other words). This could mean that we get a churning market rather than a grand swoop lower in risk in coming weeks - time will tell. Look at how the market turned around from late 2007 to the fall of 2008 to see how messy things can get before the market really makes up its mind.
While on a fundamental basis, we can find very little to celebrate, we do note that our measures of risk are showing no signs of accelerating to the downside at the moment. Junk bond spreads have improved sharply, in fact, and the VIX is divergent at this low from the markets previous low (less fear at the new price low, in other words). This could mean that we get a churning market rather than a grand swoop lower in risk in coming weeks - time will tell. Look at how the market turned around from late 2007 to the fall of 2008 to see how messy things can get before the market really makes up its mind.
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