John J. Hardy, FX Consultant, Saxo Bank
FX Update: Trouble on the way Down Under?
Australia Construction Dip
The June AiG Performance of Construction index releases is yet another sign that the Australian housing market - or as we should call it, probably the world's worst housing bubble - is beginning to roll over. The index dropped a steep 6.8 points and below the 50 level, suggesting an outright contraction in construction. This is the second steepest drop in the survey's five year history and an obvious sign that builders see reduced demand. The Rudd incentives for home buying are fading away - not that they ever had much effect, because they were mostly aimed at first-time home buyers, few of which can afford the down payment in the outrageously overpriced Australian housing market. The increase in prices far more a result of lower interest rates, since most purchases in the last cycle have been finance at variable rates. And most new purchases have been coming from speculators rather than homeowners.
The June AiG Performance of Construction index releases is yet another sign that the Australian housing market - or as we should call it, probably the world's worst housing bubble - is beginning to roll over. The index dropped a steep 6.8 points and below the 50 level, suggesting an outright contraction in construction. This is the second steepest drop in the survey's five year history and an obvious sign that builders see reduced demand. The Rudd incentives for home buying are fading away - not that they ever had much effect, because they were mostly aimed at first-time home buyers, few of which can afford the down payment in the outrageously overpriced Australian housing market. The increase in prices far more a result of lower interest rates, since most purchases in the last cycle have been finance at variable rates. And most new purchases have been coming from speculators rather than homeowners.
One can argue that today's index dramatically moves forward the time table for housing price declines that will put the Australia economy under pressure from the consumption and bank credit angle. Throw a potentially weaker China into the mix late this year and you get full on doom and gloom Down Under in the next 12 months or longer. If Australia's key export commodities deflate 25-50% and the volumes also contract in the coming 6-12 months, could we see the RBA cash target on its way to 2.0% - or even lower - in a year's time? This is most certainly not priced into the forward curve or into AUDUSD, which is currenty trading around the 0.8500 handle. We have now priced out any further hikes from the RBA, however - quite remarkable relative to the picture a little over 2 months ago at the top of the risk rally, when expectations for this time next year were running as much as 75-100 bps higher than currently.
ECB/BoE preview
The ECB and BoE are both up tomorrow, with no rate adjustment expected for either bank. This could be an interesting couple of days for EURGBP, which has rallied very sharply, supposedly on signs of improvement in the US EuroZone bank stresses and sovereign spreads and perhaps as well on the "improvement" in the interest rate spread in favor of Europe. A Spanish auction of EUR 6 billion in 10-year debt yesterday was also considered a Euro-positive. There is endless speculation in the market on whether the recent bank stress tests were truly stressful or simply a cheap farce aimed at restoring market confidence. Market News claims that the stress tests will not include a "default" scenario - more than a bit silly, considering that Greek bonds are essentially priced for a default/debt restructuring already.
The ECB and BoE are both up tomorrow, with no rate adjustment expected for either bank. This could be an interesting couple of days for EURGBP, which has rallied very sharply, supposedly on signs of improvement in the US EuroZone bank stresses and sovereign spreads and perhaps as well on the "improvement" in the interest rate spread in favor of Europe. A Spanish auction of EUR 6 billion in 10-year debt yesterday was also considered a Euro-positive. There is endless speculation in the market on whether the recent bank stress tests were truly stressful or simply a cheap farce aimed at restoring market confidence. Market News claims that the stress tests will not include a "default" scenario - more than a bit silly, considering that Greek bonds are essentially priced for a default/debt restructuring already.
Anyway, all eyes will be on Trichet and company to see whether he can instill any confidence in the ECB's plans for dealing with the situation - and a key point of interest now, especially after a Financial Times article made the rounds this morning - is whether the ECB is eventually forced into an outright quantitative easing to kick start European banks again. Past history has shown that Mr. Trichet and company are often very behind the curve - besides the slow reaction to the sovereign debt crisis this year, we also have the amazing example of the ECB's July 2008 rate hike as the US had clearly dipped into recession and just before the commodity bubble burst. Keeping this in mind, the market may - and probably should - make up its own mind that the Euro situation is far from solved and all of the problems we have been worrying about since last December are as relevant as they ever were. Odds would seem high that the ECB meeting finally jerks the market's attention back to the direction of the EuroZone and its woes and away from the ugly stream of US fundamental data that has preoccupied the market for the last couple of weeks. If not, then any further squeeze in EURUSD may quickly lose steam ahead of the 1.3000 area.
For EURGBP, the critical resistance is the 0.8400 that defined the bottom of the old range. We shouldn't expect much from the BoE tomorrow and will have to wait for the minutes of the meeting in two weeks time for further color. The Bank will likely both applaud the government's new austerity but also use that austerity as an excuse for further inaction and caution on the trajectory of growth. In the meantime, the inflation levels will be a key focus, beginning with next week's CPI data.
Chart: EURGBP
EURGBP has rallied sharply into this week's ECB/BoE meetings - the key resistance here is the 0.8400 level which defined the old range low and the recent high as the pair rejected an attempt to break into that old range. Is the Euro at high tide here and will the ECB meeting serve as a negative catalyst for the Euro, or will the squeeze take Euro crosses even higher before they revert to trend?
EURGBP has rallied sharply into this week's ECB/BoE meetings - the key resistance here is the 0.8400 level which defined the old range low and the recent high as the pair rejected an attempt to break into that old range. Is the Euro at high tide here and will the ECB meeting serve as a negative catalyst for the Euro, or will the squeeze take Euro crosses even higher before they revert to trend?
Looking ahead
Watch out for the curious Canada Ivey PMI, which is not seasonally adjusted, meaning that it tends to run sharply higher from the beginning of the year and peaks out around May/June. It is a fairly choppy survey at times and last month’s number was a fairly robust 62.7 (we say fairly because the survey has topped out at even higher levels at this time of year in expansions of the past). We would refrain from predictions here, but the data from Canada has been on the soft side of late, so we wouldn't be surprised to see a weakish number - anything below 60 would look ugly indeed. USDCAD will likely remain in limbo until risk either breaks higher or lower, though the Ivey could prove influential within the recent range.
Watch out for the curious Canada Ivey PMI, which is not seasonally adjusted, meaning that it tends to run sharply higher from the beginning of the year and peaks out around May/June. It is a fairly choppy survey at times and last month’s number was a fairly robust 62.7 (we say fairly because the survey has topped out at even higher levels at this time of year in expansions of the past). We would refrain from predictions here, but the data from Canada has been on the soft side of late, so we wouldn't be surprised to see a weakish number - anything below 60 would look ugly indeed. USDCAD will likely remain in limbo until risk either breaks higher or lower, though the Ivey could prove influential within the recent range.
All markets seem ridiculously correlated to risk, though it is worth noting that AUDUSD, for example, is more than 400 pips off its lows for this cycle as US equities trade within a couple of percent of the lows, so there are plenty of nuances out there. And on the subject of AUDUSD - watch out for the Australia employment report tonight. Considering the weak patch in Aussie data of late, this could be a significant market mover - especially to the negative side on a bad number if risk is on the ropes elsewhere.
Stay very careful out there as always - now more than ever, as these markets look particularly treacherous.
Economic Data Highlights
- US Weekly ABC Consumer Confidence fell to -42 vs. -43 expected and -41 last week
- UK Jun. BRC Shop Price Index rose 1.5% YoY vs. 1.8% YoY in May
- Australia Jun. AiG Performance of Construction Index out at 46.4 vs. 53.2 in May
- Norway May Industrial Production out at +0.4% MoM and -0.8% YoY vs. -4.6% YoY in Apr.
- Norway May Industrial Product Manufacturing fell -0.9% MoM and rose +2.2% YoY vs. +0.2%/+3.7% expected, respectively
- Germany May Factory Orders out at -0.5% MoM and +24.8% YoY vs. +0.3%/+24.9% expected, respectively
Upcoming Economic Calendar Highlights
- Canada Jun. Ivey PMI (1400)
- US Fed's Kocherlakota to speak (1935)
- US Weekly API Crude Oil and Product Inventories (2030)
- Japan May Machine Orders (2350)
- Japan May Current Account (2350)
- Australia Jun. Employment Change/Rate (0130)
No comments:
Post a Comment