Yesterday's pull off the lows in risk appetite saw a bit of follow through overnight, but that move is retreating a bit as market is afraid to commit directionally ahead of the Bernanke speech tomorrow.
Technical tea leaves
The market continues to trade nervously ahead of tomorrow's main event (the Bernanke speech), as yesterday's "breaks" saw now follow through and proved to be head-fakes so far. AUDUSD dipped to a new low but pulled back to just above the 0.8850/60 area in this morning's trade. Likewise, NZDUSD's deep cut below 0.7000 was erased overnight. Then this morning, the reversal itself was reversed as EURUSD tickled a marginal new high above 1.2720 before diving back into the range and JPY crosses were back lower as yesterday's bond rout saw a significant consolidation heading into this morning. This kind of action suggests a lack of willingness to commit and we should be cautious in reading the technical tea leaves until tomorrow's Bernanke event is behind us.
AUD
The Aussie got a bit of support from the recovery in risk from yesterday's lows and the rejection of the technical break lower in AUDUSD, but interest rate spreads have hardly budged and don't suggest that the Aussie should switch to rally mode here. We had a very disappointing Q2 capital spending data point out overnight that suggests Australia companies are heavily reducing their capital investments. On that front, it is clear that the only sector that can keep the Australia economy humming is the mining sector, which has been its champion industry for years now, but could also prove its Achilles heel. It is clear that following copper and other key Australian commodities will be critical for understanding the currency's trajectory going forward. On that account, the mining sector was a huge positive contributor to the capital expenditure data, so the overall number ex-mining would have shown an even steeper decline. And spending expectations from the mining industry are still very robust for the year forward.
Chart: AUDUSD and copper
These two instruments are joined at the hip. Copper is often considered a barometer on economic growth, as it the Aussie. The trajectory for both of these will be determined by China, which is the main destination of Australian copper and other exports and which has supported the Australian economy with its imports of thermal coal for steel-making and other key ores that end up in China's endless construction and infrastructure buildout. The question is when too much overcapacity in an economy is too much? When that point is discovered and the implications are pondered, AUDUSD is more likely to be trading close to 0.70 rather than 0.90. Until then, let's all enjoy the ride.
US claims data
The Weekly Claims data saw a sharp drop this week from yesterday's big move to 500k (now revised to 504k). As we have said many times recently, we have to take claims data at this time of year with a considerable grain of salt due to the seasonal adjustments, which are particularly large at this time of the year when firings are at their lowest rate of the year. We'll have a better idea of the claims trend as we head into October than we do now. Still, the number is the lowest reading in four weeks, so the market might draw a bit of hope from it ahead of next Friday's employment report. The bond market has decided to react strongly to the data in the immediate after math and this saw some pop in the JPY crosses, but any reaction is likely to be short-lived considering the volatility of any weekly data series and the far more important event risks on the horizon like tomorrow's Fed speech and next week's raft of important numbers.
The Weekly Claims data saw a sharp drop this week from yesterday's big move to 500k (now revised to 504k). As we have said many times recently, we have to take claims data at this time of year with a considerable grain of salt due to the seasonal adjustments, which are particularly large at this time of the year when firings are at their lowest rate of the year. We'll have a better idea of the claims trend as we head into October than we do now. Still, the number is the lowest reading in four weeks, so the market might draw a bit of hope from it ahead of next Friday's employment report. The bond market has decided to react strongly to the data in the immediate after math and this saw some pop in the JPY crosses, but any reaction is likely to be short-lived considering the volatility of any weekly data series and the far more important event risks on the horizon like tomorrow's Fed speech and next week's raft of important numbers.
Looking ahead
The market will likely continue to trade nervously ahead of tomorrow's speech. Again, the key here is to what degree the market is investing its hope in QE2 and to what degree Mr. Bernanke will deliver. If hopes are high for QE, we suspect that Mr. Bernanke will disappoint, which would have the usual results in FX - negative for pro-risk commodity currencies and positive for the USD. The question, as we suggested in yesterday's closing note, is whether a QE2 disappointment would see a bond consolidation, which could finally mean the USD getting out from under the Yen's thumb if we get both risk aversion and a treasury sell-off - perhaps the most interesting scenario.
The market will likely continue to trade nervously ahead of tomorrow's speech. Again, the key here is to what degree the market is investing its hope in QE2 and to what degree Mr. Bernanke will deliver. If hopes are high for QE, we suspect that Mr. Bernanke will disappoint, which would have the usual results in FX - negative for pro-risk commodity currencies and positive for the USD. The question, as we suggested in yesterday's closing note, is whether a QE2 disappointment would see a bond consolidation, which could finally mean the USD getting out from under the Yen's thumb if we get both risk aversion and a treasury sell-off - perhaps the most interesting scenario.
Economic Data Highlights
- Australia Q2 Private Capital Expenditure fell -4.0% QoQ vs. +2.3% expected
- Germany Sep. GfK Consumer Confidence out at 4.1 vs. 4.0 expected and 4.0 in Aug.
- Switzerland Q2 Employment Level rose +0.6% vs. +0.8% expected
- Sweden Jul. Trade Balance out at 10.3B vs. 6.5B expected and 9.7B in Jun.
- Sweden Jul. PPI out a +0.1% MoM and +1.0% YoY vs. +0.3%/+1.2% expected, respectively
- Sweden Jul. Unemployment Rate out at 8.0% vs. 7.9% expected and 9.5% in Jun.
- Sweden Jul. Household Lending rose 8.8% YoY vs. 8.9% in Jun.
- UK Aug. CBI Reported Sales out at 35 vs. 18 expected and 33 in Jul.
- US Weekly Initial Jobless Claims out at 473k vs. 490k expected and 504k last week
- US Weekly Continuing Claims out at 4456k vs. 4495k expected and 4518k last week
Upcoming Economic Calendar Highlights
- US Mortgage Delinquencies (1400)
- US MBA Mortgage Foreclosures (1400)
- Japan Jul. Jobless Rate (2330)
- Japan Jul. Overall Household Spending (2330)
- Japan Jul. National CPI (2330)
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