Our measures of risk appetite across markets suggest that traders are still aching to put on risk, even as the USD weakness is not particularly pronounced ahead of the weekend. What gives? Also, a look at the EURCHF breakout and what might be driving it.
USD and G-20
We noted that markets were finally beginning to move in different directions this morning. Not much has changed on that account today, though the ranges are rather muted ahead of the weekend as the market mulls whether anything is. The crazy Geithner idea could actually gain acceptance and come to pass in some form simply because it is an easy framework to agree on and an impossible one to enforce. This article from Reuters aptly compares the Geithner plan with the EU stability pact that has proven so toothless even for the comparatively tight-knit EuroZone.
We noted that markets were finally beginning to move in different directions this morning. Not much has changed on that account today, though the ranges are rather muted ahead of the weekend as the market mulls whether anything is. The crazy Geithner idea could actually gain acceptance and come to pass in some form simply because it is an easy framework to agree on and an impossible one to enforce. This article from Reuters aptly compares the Geithner plan with the EU stability pact that has proven so toothless even for the comparatively tight-knit EuroZone.
Risk appetite: still pedal to the metal
While bonds have eased lower (yields higher) and the market has taken its foot off the “death to fiat currencies” trade as gold and silver consolidate, other measures of risk appetite expanded sharply over the last couple of trading sessions, including junk bond spreads and corporate credit measures (a very strong start to earnings season is helping out there). The pause in the USD down move has also seen FX implied volatility recede a bit. Emerging market bond spreads remain relatively supportive of risk positions as well. But while there are no real signs of danger at the moment for the risk bulls in many of these kinds of indicators – we would suggest that complacency is dangerously higher and speculative positioning very heavy, judging from evidence in sentiment surveys, the fact that we’re seeing record inflows into EM equity funds, and based on positioning surveys by the CFTC. We must also consider the idea that the Bush era tax cuts may come to an end after all on the potential for mad and lame duck Democrats in no mood to cooperate with Republicans ahead of the changing of guard early next year. The tax cuts are set to expire on January 1. This Reuters article offers good coverage.
While bonds have eased lower (yields higher) and the market has taken its foot off the “death to fiat currencies” trade as gold and silver consolidate, other measures of risk appetite expanded sharply over the last couple of trading sessions, including junk bond spreads and corporate credit measures (a very strong start to earnings season is helping out there). The pause in the USD down move has also seen FX implied volatility recede a bit. Emerging market bond spreads remain relatively supportive of risk positions as well. But while there are no real signs of danger at the moment for the risk bulls in many of these kinds of indicators – we would suggest that complacency is dangerously higher and speculative positioning very heavy, judging from evidence in sentiment surveys, the fact that we’re seeing record inflows into EM equity funds, and based on positioning surveys by the CFTC. We must also consider the idea that the Bush era tax cuts may come to an end after all on the potential for mad and lame duck Democrats in no mood to cooperate with Republicans ahead of the changing of guard early next year. The tax cuts are set to expire on January 1. This Reuters article offers good coverage.
As for our chart below – it shows the USD carry traders taking a pause here even while risk appetite has moved higher – but we have would postulate that the USD could be the tail wagging the dog at the moment because of the strength of the market’s USD view.
EURCHF and interest rate spreads.
EURCHF has been a bit reluctant to participate in the EUR strength evident in other crosses, but now we finally see the market bidding up EURCHF on its recent break of key resistance around 1.3500 after a false break yesterday. The reason for the CHF weakness? Perhaps the panic easing off on the precious metals trade is one reason, but also the interest rate spread has long ago started stretching more drastically to the Euro’s advantage, as the below chart of the 2-year swap spreads between the EuroZone and Switzerland indicate. The rate EUR rates are headed higher lately is unsustainable in our view, though one can also argue that there is more upside to price into this pair if spreads are the only focus. Further out, we wonder how long the market can fail to focus on the longer run sovereign debt/EuroZone framework issues and the potential for a situation like that in France to spiral out of control. At present, the market is trading the Euro like Germany is the only country in the bloc…
EURCHF has been a bit reluctant to participate in the EUR strength evident in other crosses, but now we finally see the market bidding up EURCHF on its recent break of key resistance around 1.3500 after a false break yesterday. The reason for the CHF weakness? Perhaps the panic easing off on the precious metals trade is one reason, but also the interest rate spread has long ago started stretching more drastically to the Euro’s advantage, as the below chart of the 2-year swap spreads between the EuroZone and Switzerland indicate. The rate EUR rates are headed higher lately is unsustainable in our view, though one can also argue that there is more upside to price into this pair if spreads are the only focus. Further out, we wonder how long the market can fail to focus on the longer run sovereign debt/EuroZone framework issues and the potential for a situation like that in France to spiral out of control. At present, the market is trading the Euro like Germany is the only country in the bloc…
Norges Bank gets new Governor
Norges Bank's new governor, Oeystein Olsen, was appointed today and his first speech suggested he will do little to rock the boat and make Norway stand out in any way from the international policy scene on monetary policy as he suggested that the krone's strength would be a determinant of interest rate policy. "Norges Bank cannot go alon for sure; international developments including itnerest rate paths abroad will potentially affect" policy "via the exchange rates", he was quoted as saying in a Businessweek article today.
Norges Bank's new governor, Oeystein Olsen, was appointed today and his first speech suggested he will do little to rock the boat and make Norway stand out in any way from the international policy scene on monetary policy as he suggested that the krone's strength would be a determinant of interest rate policy. "Norges Bank cannot go alon for sure; international developments including itnerest rate paths abroad will potentially affect" policy "via the exchange rates", he was quoted as saying in a Businessweek article today.
As for the market reaction to today's announcement, interest rate moves suggested that we have a fairly dovish new governor on our hands, though the FX reaction was far more NOK positive. The next key supports in EURNOK are 8.0500 (a previous high) and the psychologically important 8.00 level, which is just above 8.00. It would seem that Mr. Olsen's would take away some of the potential downside for the pair, though the Norges Bank has long had a tendency to quickly intervene verbally in the market on large currency moves. The chart below suggests that there is no pressure at all on the downside from an interest rate perspective.
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