Financial Advisor

FX Update: Commodity currencies taking a beating

The Euro is suddenly suffering again, this time on weak data. Is the US economic malaise spreading across the pond? Also - US House to vote on measure next Friday that would allow trade protectionist policies aimed at China.
Euro
The news flow from Europe today is not particularly supportive of the last couple of days' sharp upside in the single currency. Today, the German and EuroZone preliminary Manufacturing and Services PMI's were all disappointing. The sharpest drop was in the German manufacturing PMI, which fell 2.9 points to 55.3 from 58.2 in August and the lowest level since January.  Also pressuring the Euro was news of Ireland's GDD shrinking 1.2% in Q2, vs. a small positive number expected. That's about -5% annualized, folks - not a pretty picture. So much for that successful Irish bond auction earlier this week - obviously more about gaming the ECB rather than the belief in Irish fundamentals. The 10-year yield spreads between Ireland and Germany have now jumped to a record high above 4.15%
Speaking of Germany, another possible source of pressure on the Euro was the announcement that Germany will only be selling some EUR 60 billion worth of bonds and bills in Q4, some 29 billion less than expected before the beginning of the year. This has helped Bunds vault higher today and is seeing a fairly sharp tightening of the spreads between Euro and US debt at the short end - in two year rates to the tune of about 4 basis points since the FOMC meeting on Tuesday. That spread is still 75 basis points, however, versus a spread of almost 0 when EURUSD bottomed earlier this year.
One can't help but wonder if the economic slowdown that clearly started in the US is beginning to spread across the pond now. A number of recent data points support that theory, but the currency charts don't just yet. We would need to see EURUSD slip back below that 200-day moving average (about 1.3215) quickly to get better confirmation, though it is interesting that EURUSD slipped back below the previous high at 1.3335 for a time today before finding support.  (We would also like to see a tightening in rate spreads - though the ECB will need to stop sterilizing PIGS debt purchase perhaps to see a more realistic rate at the front end of the curve in Europe?)
US and the Yuan
The yuan issue is reaching critical proportions over the next week as the House Ways and Means committee will vote on a house bill that would give the US Commerce Department the power to charge duties on Chinese imports. Here is coverage on the issue from the Washington Post. On China's behalf, Wen Jiabao was out bleating that the 20% figure that many throw around as the amount by which the CNY is overvalued would cause a major upheaval. But there is some evidence of Chinese humility or wanting to avoid a head-butting if we have a look at USDCNY chart, which is steeply falling in recent weeks. Over the last (cherry-picked) 18 trading days, the yuan has appreciated some 1.8% vs. the greenback, not an enormous amount, but to put that in perspective, that is the largest directional move in the pair over such a time-span since the revaluation of 2005. From the moment of devaluation some five years ago to today, the yuan is some 19.5% stronger.
USD correlation with risk: back to the same old same old
Today appears to very firmly answer the question we posed yesterday: when equities were a bit lower post-FOMC, the USD was lower too - highly unusual relative to previous behavior - so we asked whether this was merely a temporary blip in the correlation or if something interesting was developing. It is clear from today's  market activity that it was just a hiccup in the correlation as the sell-off in risk today is seeing the expected bid in the USD, particularly against the pro-risk currencies. The yen and franc are also stronger on the bond rally and one wonders if the BoJ will come sniffing and if so, at what level. A random stab in the dark suggests that a 0.618 retracement of the wave off the low might be an area, also as it comes in just above the 84 handle. The pressure is really on the BoJ here with the US 10-year only about 10 bps off the low for the cycle at 2.41%.
Chart: USDCAD
The commodity currencies are taking quite a beating today against the lowest yielders on all of the bad news and risk aversion. After the terrible data of late from Canada and the BoC out complaining about the currency's strength, it was perhaps not surprising to see yesterday's turnaround in USDCAD - a huge outside day reversal. But at present, the pair is banging up against the 200-day moving average once again - of course we can see how little this moving average is largely irrelevant after more than 200 days of range trading now. Is there enough oomph to take USDCAD higher? Perhaps, if risk appetite remains on the defensive and if the very weak oil prices weaken even more.

Looking ahead
US Jobless Claims data is a disappointment to risk appetite and ...a, surprise, support to the USD (imagine a day when the market makes sense again - will it ever come?). Later today we have the US Existing Home Sales data. If we get a strong data point there, it will sow the seeds of the idea that the US housing market is better off than the market believed, but really, the distortions from the tax incentives that expired at the end of April could mean that we get a bump for a couple of months within an overall downtrend as a larger and larger percentage of home purchases were planned and executed by buyers after the incentive's expiration.
The data tomorrow is interesting, with the German IFO survey out (please don't tell us that we are going to hit another high for the cycle - that would simply defy belief. Bloomberg expectations are for a virtually unchanged level from August, which was the highest since June of 2007.) Also up are August US Durable Goods orders and August US New Home Sales. The ex Transportation Durable Goods Orders number for July saw the sharpest drop since the months of the financial crisis. One month of very weak data can be overlooked, but another ugly surprise tomorrow would represent a fairly severe challenge to the noo-double dip crowd.
Be careful out there.

Economic Data Highlights
  • New Zealand GDP out at +0.2% QoQ vs. +0.7% expected
  • Germany Sep. preliminary Manufacturing PMI out  at 55.3 vs. 57.6 expected and 58.2 in Aug.
  • Germany Sep. preliminary Services PMI out at 54.6 vs. 57.2 expected and 57.2 in Aug.
  • EuroZone Sep. preliminary Manufacturing PMI out at 53.6 vs. 54.5 expected and 55.1 in Aug.
  • EuroZone Sep. preliminary Services PMI out at 53.6 vs. 55.5 expected and 55.9 in Aug.
  • UK Aug. BBA Loans for House Purchase out at 31.8k vs. 34k expected and 34.2k in Jul.
  • US Weekly Initial Jobless Claims out at 465k vs. 450k expected and 453k last week
  • US Weekly Continuing Jobless Claims out at 4489k vs. 4473k expected and 4537k last week
Upcoming Economic Calendar Highlights
  • US Aug. Existing Home Sales (1400)
  • US Aug. Leading Indicators (1400)
  • US Fed's Evans to speak (1440)
  • US former Fed chairman Volcker out speaking (1700)
  • China MNI Business Condition Survey (0135)

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