The USD was pushed to the mat overnight, but found strong support in the critical EURUSD cross just ahead of “final” short term resistance. With this reversal, the line in the sand is drawn for the USD this week and today’s close gives us a status on near term direction.
Portuguese bond auction
Portugal managed to go through the motions on a debt auction today, with yields falling slightly relative to recent highs, but the involvement of the ECB is a certainty and the real market price is impossible to determine, so we can’t really take much away from today’s debt sale. The country’s leadership is trying to put on a brave face and claim that no bailout will be necessary and touting its reduction of the deficit last year, but all signs point to the inevitability of a bailout and the latest noise from unnamed sources is that talks are continuing, with some combination of debt buybacks/low-interest rate rescue loans and guarantees in the works. It’s mostly a question of timing and one wonders whether the actual announcement of a bailout might be a Euro positive for a short time in some of the crosses at least. In the meantime, EURUSD pressed its case toward the 200-day moving average (around 1.3070), but fell short and reversed sharply, emphasizing that area as a critical short term resistance.
Portugal managed to go through the motions on a debt auction today, with yields falling slightly relative to recent highs, but the involvement of the ECB is a certainty and the real market price is impossible to determine, so we can’t really take much away from today’s debt sale. The country’s leadership is trying to put on a brave face and claim that no bailout will be necessary and touting its reduction of the deficit last year, but all signs point to the inevitability of a bailout and the latest noise from unnamed sources is that talks are continuing, with some combination of debt buybacks/low-interest rate rescue loans and guarantees in the works. It’s mostly a question of timing and one wonders whether the actual announcement of a bailout might be a Euro positive for a short time in some of the crosses at least. In the meantime, EURUSD pressed its case toward the 200-day moving average (around 1.3070), but fell short and reversed sharply, emphasizing that area as a critical short term resistance.
Japan was out announcing that it planned to buy more than a fifth of the bonds to be sold later this month aimed at funding the Irish bailout. Further down the road, this kind of news only matters if Ireland doesn’t elect a government that decides to restructure debt and if the EU/ECB and Spain are able to get ahead of the curve on its public debt demons. It’s these “ifs” that are dogging the Euro more than the drip-feed of positive-for-spreads news on the smaller PIGS. Spain is the one to watch.
Australia floods
The flooding situation in Australia is rapidly worsening as flood waters are peaking in Brisbane today and tomorrow, and the RBA’s McKibbin estimated that the floods could cost a full percentage point of GDP this year. This knocked the Aussie sharply lower overnight, but the currency rebounded against most of its peers in a sign that the negative potential of this terrible natural disaster has peaked. Still, if we have a look at interest rate spreads versus the USD, for example, there appears to be little for the Aussie to build on here (though the strong equity rally in the US suggests otherwise). A natural resistance level comes in at parity for the AUDUSD. Many will argue that natural disasters can actually turn out as a GDP-positive in the longer term as they increase activity levels due to the need to rebuild.
The flooding situation in Australia is rapidly worsening as flood waters are peaking in Brisbane today and tomorrow, and the RBA’s McKibbin estimated that the floods could cost a full percentage point of GDP this year. This knocked the Aussie sharply lower overnight, but the currency rebounded against most of its peers in a sign that the negative potential of this terrible natural disaster has peaked. Still, if we have a look at interest rate spreads versus the USD, for example, there appears to be little for the Aussie to build on here (though the strong equity rally in the US suggests otherwise). A natural resistance level comes in at parity for the AUDUSD. Many will argue that natural disasters can actually turn out as a GDP-positive in the longer term as they increase activity levels due to the need to rebuild.
Chart: AUDUSD
An attempt at a comeback today, though we have the 55-day moving average at 0.9925 and the psychological parity level to deal with. Watch for the Australian employment report out tonight. Against the rest of the G-10 as a basket, the Australian dollar is seeing its most significant sell-off since the early summer, just before the equity market bottomed and launched its furious rally into this year.
An attempt at a comeback today, though we have the 55-day moving average at 0.9925 and the psychological parity level to deal with. Watch for the Australian employment report out tonight. Against the rest of the G-10 as a basket, the Australian dollar is seeing its most significant sell-off since the early summer, just before the equity market bottomed and launched its furious rally into this year.
Odds and ends
UK Trade Balance: yet another terrible monthly figure from the UK as the trade deficit came in at a record high level. The news received little attention, but this is a profoundly disturbing trend in the bigger picture and distinct disappointment that the weak sterling of the last couple of years has failed to see an improvement in terms of trade. Let’s see if this trend is reversed this year as austerity measures take hold.
UK Trade Balance: yet another terrible monthly figure from the UK as the trade deficit came in at a record high level. The news received little attention, but this is a profoundly disturbing trend in the bigger picture and distinct disappointment that the weak sterling of the last couple of years has failed to see an improvement in terms of trade. Let’s see if this trend is reversed this year as austerity measures take hold.
Strong home loans data from Australia helped boost the AUD overnight as it suggests the Australian housing market would prefer to die another day. Home loans for owner occupied housing have been increasing steadily since last summer, but the rate is still far below the 2009 peak.
Canada housing prices edged higher in November, according to official data, but we underline that housing affordability is a tremendous problem in Canada, that gains in the Canadian housing bubble have exceeded those in the US during its bubble, and that the Canadian consumer is more overleveraged than any other consumer in the world. So let’s enjoy the USDCAD sell-off as long as oil rallies above 90, but tuck in the back of our mind that Canada will one day also face a post-housing/consumer credit bubble of its own. Tick-tock. Good thing that the Canadian government has a low public debt level as its starts down the road already traveled by the US and some of the European countries during the last cycle.
Looking ahead
The next focus today is on the US 10-year treasury auction. USDJPY is still rather buoyant as yesterday’s auction was greeted as neither here nor there and US treasuries have not followed up on their rally from last week – in fact, they are threatening to reverse the rally and German bunds have already collapsed again. We wonder aloud (again again) at what yield the market decides that the interest rates and higher commodity prices threaten global growth. The “everything up” trade (commodities, interest rates, equities) is not a long term proposition.
The next focus today is on the US 10-year treasury auction. USDJPY is still rather buoyant as yesterday’s auction was greeted as neither here nor there and US treasuries have not followed up on their rally from last week – in fact, they are threatening to reverse the rally and German bunds have already collapsed again. We wonder aloud (again again) at what yield the market decides that the interest rates and higher commodity prices threaten global growth. The “everything up” trade (commodities, interest rates, equities) is not a long term proposition.
Watch for the US Fed’s Beige Book later, though we expect no real surprises. It is abundantly clear that the FOMC intends to carry out the rest of its QE2 program. The Dallas Fed’s Fisher is out speaking today – he is perhaps the leading light on the hawkish side of the FOMC and we would like to see whether he will choose to pick up where the now non-voting Hoenig left off with loud dissent on Fed policy.
Aussie traders need to watch for the December employment report out tonight in Australia. The data has been incredibly strong in recent months, so the market is looking for some mean reversion in this data series.
Tomorrow we have the BoE and ECB on tap (anything interesting from Trichet for once?), UK production figures, US Dec. PPI and weekly jobless claims, and Canada and US trade figures for November.
Economic Data Highlights
- US Weekly ABC Consumer Confidence out at -40 vs. -45 last week
- Japan Nov. Adjusted Current Account Total out at ¥1145.1B vs. ¥1150B expected and ¥1463B in Oct.
- UK Dec. BRC Shop Price Index rose +2.1% YoY and ex Food rose +1.1% YoY vs. 2.0%/0.9% in Nov., respectively
- US Jan. IBD/TIPP Economic Optimism Poll out at 51.9 vs. 47.0 expected and 45.8 in Dec.
- Australia Nov. Home Loans rose 2.5% MoM vs. -1.0% expected
- Australia Nov. Investment Lending fell -2.3% MoM
- UK Nov. Visible Trade Balance out at £8736M vs. £8350M expected and £8591M in Oct.
- EuroZone Nov. Industrial Production out at +1.2% MoM and +7.4% YoY vs. +0.5%/+5.9% expected, respectively and vs. +7.1% YoY in Oct.
- Canada Nov. New Housing Price Index rose +0.3% MoM vs. +0.1% expected
- US Dec. Import Price Index rose +1.1% MoM and +4.8% YoY vs. +1.2%/+4.7% expected, respectively and vs. +3.9% YoY in Nov.
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly DOE Crude Oil and Product Inventories (1530)
- US Fed’s Fisher to Speak on Monetary Policy (1800)
- US Fed’s Beige Book (1900)
- New Zealand Dec. NZ Credit Card Spending (2145)
- New Zealand Dec. QV House Prices (2300)
- Japan Nov. Machine Orders (2350)
- Australia Dec. Employment Change/Unemployment Rate (0030)
- China Nov. Conference Board Leading Economic Index (0200)
- Japan Dec. Machine Tool Orders (0600)
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