Financial Advisor

FX Update: New Year Hangover?

The EUR, GBP and USD remain the weak triad as risk appetite remains robust despite no real news flow save for ugly confidence numbers out of the US. Is this market wildly complacent ahead of the New Year?

US Confidence vs. Market Confidence
Yesterday’s US Conference Board Consumer Confidence number for December was a real disappointment considering the recent positive momentum in equities and some of the other confidence surveys. Both the University of Michigan and weekly ABC Consumer Confidence surveys were recently out at close to post Lehman-bankruptcy highs, but the Conference Board number dipped again rather than seeing the expected rise. The weekly ABC number out last night also dipped sharply back into the old range and the two surveys suggest that the “Average Joe” is far from feeling the kind of wild optimism that is evident in the market’s extreme levels of complacency. The only hope is that the average consumer’s confidence level remains tied to the employment picture and that both are lagging indicators.  On the market confidence side of the picture, we have surveys suggesting extreme complacency in equity markets – certainly a contrarian signal that we should be very cautious for at least the short term as we head into the New Year. The AAII surveys show the largest differential in Bulls vs. Bears since the very month of the market’s all time peak in October 2007. The contrarian trade here, therefore is short the likes of AUDUSD and NZDUSD, though considering the ranges and volatility during times of rather thin liquidity, many will likely seek to look at trading this through the options market.

US Treasury auction
The US treasury’s auction of five-year debt yesterday was very weak, which touched off a sell-off in bonds and only put a slight bid on the USD on the positive yield implications for the currency. While the Fed will continue to purchase treasuries through next June, there is plenty to worry about if other parties show increasing reluctance to buy US debt. It’s interesting to see such weak results at the very part of the curve where the Fed has promised to carry out the bulk of its purchases. Today sees a slightly smaller $29 billion auction of 7-year notes. Still, it’s hard to draw too many conclusions from this auction, considering the liquidity conditions and the fact that many participants in the market have likely closed their books for 2010. The first key test for US treasury demand in the New Year comes on January 11-13, with three auctions of 3-, 10- and 30-year debt, respectively.
Curiously, the weak action in the US treasury market has done little to keep a lid on the JPY, which has rallied sharply against the weak trio of the USD, GBP and EUR over the last couple of days. The Swiss franc has also been a curious destination in time of surging risk appetite and higher yields, even if it makes sense to see it stronger from a Euro-crisis point of view. It’s hard to draw a bead on the market’s logic in general when we look at the stronger CHF and strong JPY. If the worry is about sovereign debt credibility as interest rates rise, for example, why should the market bid up the yen?  Perhaps we’re simply seeing a squeeze in thin markets – let’s see where these currencies are trading by the close of next Friday before we try to extract too much meaning from the current market moves.

Chart: USDJPY
USDJPY dove lower yesterday, but bounced in an attempt to maintain the supports at the 55-day moving average (red line) and the bottom of the daily Ichimoku cloud, but the evidence today is that this attempt to maintain support has failed and the break lower could open up for a try at the 15-year low from November 1 at 80.23.  It will be very interesting to see the next round of policy response from the Bank of Japan if USDJPY trades back below 80 in the coming weeks.

Looking ahead
The market moves this week look like a contrarian’s dream – certainly if we look along the axis of risk appetite. On the other hand, we would be reluctant to look at Europe from a contrarian angle, as the worries there are still very valid and we’ve yet to see the sovereign debt crisis credibly addressed by EU/ECB leadership.
Looking at the calendar for the final days of the year here, we’ve got a Japanese Manufacturing PMI out tonight (note the dip below 50 in November), US weekly jobless claims, US Dec. Chicago PMI, and US Nov. Pending Home Sales tomorrow. Friday sees an Australian Nov. RP Data-Rismark Home Price survey and the UK Nationwide Home Price data (strong evidence of gathering negative momentum there after a bump in prices in early 2009 to early 2010).

tecEconomic Data Highlights
  • US Weekly ABC Consumer Confidence out at -44 vs. -41 last week
  • Sweden Nov. Trade Balance out at +10B vs. +3B expected and +6.2B in Oct.
  • Switzerland Dec. KOF Swiss Leading Indicator out at 2.1 as expected and vs. 2.13 in Nov.
Upcoming Economic Calendar Highlights (all times GMT)
  • Canada Oct. Teranet/National Bank Home Price Index (1400)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • Japan Dec. Nomura/JMMA Manufacturing PMI (2315)
  • China Dec. HSBC Manufacturing PMI (0230)

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