The risk bears in FX land felt the worst of the recent squeeze on their positions today as rather weak US employment data late in the week spoiled the signs of a comeback from the US economy. But what now?
The roundup:
USD: US data generally showed signs of improvement, with both ISM’s fairly strong (particularly the non-manufacturing survey today, with nice gains in the employment and new orders sub-indices). But on the employment front, we were misled by a strong ADP number that was trumped by a very bad Challenger Job Cuts reading (worst in eight months), a renewed uptick in the weekly jobless claims, and then a very disappointing payrolls number today, that was accompanied by a renewed surge in the unemployment rate and non-growth in monthly earnings. Though it was a real downer, we find the strength in the ISM non-manufacturing survey (which is far more forward an indicator) a reason to not entirely give up hope on the belief that the US may show a bit of resilience for another month or so. The public sector may be dragging the economy more with its austerity at the local and state level even as the private sector looks resilient at the moment.
EUR: The EuroZone has thrown together a package for Ireland that really only represents a kicking of the can down the road. The Irish population should rise up and reject this package and elect a government that will promptly default on the debt and look for a fair restructuring. While that may eventually happen, the market preferred to focus on sovereign debt spreads later this week, which tightened sharply after the plan was announced and it was made clear that bondholders wouldn’t have to take a haircut until 2013.
As we go further down the road (where the can has been kicked), we insist that we have a lose-lose situation for the EuroZone. The only ways out of its predicament are these: first, a default and a massive restructuring/bailout out of the banks right now or very soon. This is Euro negative because of the uncertainty and very poor economic growth and immediate damage to the financial sector it would entail, even though it would mean a quicker solution and return to prosperity, particularly for those nations that might choose to use the opportunity to leave the EuroZone. The other option is the current one – awkwardly continuing to pretend that a bailout and related austerity packages will work by spreading the default risk all over Europe (i.e., to the German tax payer), where the problem only festers and explodes once again down the line. Sure – if the focus is on the short term move in Euro spreads, then this spells Euro relief. If the focus is on the longer run question of whether this fixes the problem, the answer is no. The demise of the Euro promises to be a drawn out process.
GBP: Sterling showed renewed signs of following the USD weaker as it has also been sharply weaker versus the single currency on the signs of PIGS debt relief, though it managed a modest rally against the greenback later in the week. The country saw a very strong manufacturing PMI for the month.
AUD: Australia saw a rash of mostly negative data, but still managed a surge later in the week after AUDUSD tried to break lower as the negative data and unfavorable moves in interest rate spreads gained far less attention than the sharp rally in risk appetite and commodities – particularly copper and the metals complex. The strong return to the carry trades starting mid-week particularly favored Aussie in today’s trading. Big event risk next week with the RBA on tap.
CAD: Canada saw an ugly employment report today that showed full time employment actually contracting even as the unemployment rate fell due to a falling participation rate . But USDCAD could not sustain the attempt above 1.0200 as risk appetite was on the rise by mid-week and due to the incredible snap back in oil prices, which started the week at around 84 dollars a barrel and are ending the week above 89 dollars.
CHF: The Swiss franc showed that it isn’t particularly correlated with anything, but it perhaps piggy-backed the Japanese Yen in today’s action as bonds tried to find a floor and the short end of the US curve rallied very steeply on the back of the US employment report.
JPY: same as for CHF above – today’s action really proves that it is the short end of the curve that gets the focus when we’re looking at interest rate spread implications for currencies’ relative strength.
Summing it up
The reversal from mid-week has technically reversed the attempt by the risk bears to carry the day. We still don’t have a solid close above the highs in the US equity market to fully reverse the move, but it looks like the bulls will at least give it a try. The consensus is probably that this recent rally will last through to the New Year, but we would prefer the one- to two- week timeframe unless some of our other risk indicators show more signs of improving. These include junk bond spreads and emerging market spreads. And isn’t it interesting that US equities have outperformed the global EM equities of late, which are still below their highs for the year? EM was supposed to be the leader.
The reversal from mid-week has technically reversed the attempt by the risk bears to carry the day. We still don’t have a solid close above the highs in the US equity market to fully reverse the move, but it looks like the bulls will at least give it a try. The consensus is probably that this recent rally will last through to the New Year, but we would prefer the one- to two- week timeframe unless some of our other risk indicators show more signs of improving. These include junk bond spreads and emerging market spreads. And isn’t it interesting that US equities have outperformed the global EM equities of late, which are still below their highs for the year? EM was supposed to be the leader.
Technically speaking:
EURUSD: This rally could stop soon, but we must give leeway for a retracement as high as the 55-day moving average, currently close to 1.3700 if the 21-day moving average (currently at 1.3500) is taken out. Support is at the 200-day moving average.
GBPUSD: 1.5860 is where the 55-day moving average is currently trading and the 0.618 retracement of the downwave is up just under 1.6000
EURGBP: The 200-day moving average at around 0.8550 is the key focus for the pair
AUDUSD: 0.9935 is the 0.618 retracement level for the sell-off wave, and then we have parity to contend with. Don’t forget to keep an eye on spiking commodity prices – particularly copper and precious metals. We have an RBA meeting next week as well.
USDCAD: parity parity parity the focus. We have a BoC meeting next week and Ivey PMI. If crude oil is ripping above 90 dollars a barrel again, we could see a solid attempt to take out parity for a time. The relative weakness of CAD in the crosses today specifically shows that the weak USD will mean that CAD is generally an underperformer here unless oil goes completely wild to the upside.
Have a wonderful weekend and stay careful out there.
Europe's debt woes are not a top concern for most investors but should be as Cliff Risk emerged in the European Financials, EUFN, on November 5, 2010 as sovereign and corporate interest rates rose and as currency traders sold the Euro and other currencies. It was on this date that the world pivoted from the age of prosperity and into the age of deleveraging, as is seen in the MSN Finance six month chart of world government bonds, BWX, the 30 Year US Government bonds EDV, and the 10 to 20 Year US Government Bonds, TLT.
ReplyDeleteThis week, European Financial Institutions, EUFN, were restored to life by ECB announcement of ongoing purchases of debt. World government bonds, BWX, and international corporate bonds, PICB, rose, which contrasts with US Treasures, EDV, and TLT, as well as US based corporate bonds, LQD and BLV, which fell lower.
The European Financial Institutions, EUFN, in particular these eight: Deutsche Bank DB of Germany ….. Banco Santander, STD, Spain ….. ING Groep NV, ING, Netherlands .…. Credit Suisse, CS, Switzerland, ….. Royal Bank of Scotland, RBS, Scotland ….. HSBC, HBC, United Kingdom ….. Barclays, BCS, The UK …... UBS, Switzerland ….. have gone beyond the tipping point and are at cliff risk ….. as the liabilities of the bank-sovereign debt symbiosis grow stronger.
Soon the European Financial Institutions will be going over the cliff, as the sovereign crisis deepens and bond vigilantes call interest rates higher, the market insiders short sell the banks, and as currency traders sell the Euro, FXE.
Out of Götterdämmerung, that is a investment flameout, a Sovereign, that is a European Chancellor, a leader like Herman van Rompuy, and a Seignior, a top dog banker, like Olli Rehn or Jean Claude Trichet, will emerge from Europe’s Core, to provide fiscal sovereignty and both credit and fiscal seigniorage and implement strong economic governance like the world has never known or even thought possible.
The investment application is to purchase and take physical possession of gold and silver bullion.