Market not quite sure what to do with this environment as the cross currents of the Japan earthquake fall-out, EU bailout revamping and FOMC expectations make for a confusing cocktail at the moment. Meanwhile, FX volatility is justifiably rising. Where do we go next?
In our post from earlier today, we mentioned that damage estimates are running in “up to $35 billion” range for the quake damage in Japan, with everyone quoting some “risk modeling” company called AIR worldwide, but what we did not notice was that this estimate does not include “additional tsunami losses…not yet counted”. With every news report from the affected region ofJapan, meanwhile, horrifying estimates of the human toll are mounting, and the financial damage is likely an order of magnitude higher than that estimate. The Nikkei was off some 6% overnight and is down more than 10% from its close last Wednesday, essentially qualifying as a crash. It will be hard for the markets to simply brush this tragedy aside as the after-effects will ripple around the financial world in coming weeks.
Looking ahead
The reaction pattern to events in the major currencies is a bit confusing at the moment – the Euro has caught a bid from the surprisingly convincing re-jiggering of the EFSF bailout mechanism at this weekend’s EU Summit, where expectations for real progress were virtually nil. While the bonds for the most peripheral countries remain unloved at the moment (due to the fact that mention is made in the new deal about possible purchase of bonds in the primary rather than secondary market), the yields on Spanish and Italian bonds has fallen dramatically on the weekend’s events. Elsewhere, the USD is neutral and the pro-cylical currencies like CAD, AUD, NZD and SEK are trading on the weak side.
The reaction pattern to events in the major currencies is a bit confusing at the moment – the Euro has caught a bid from the surprisingly convincing re-jiggering of the EFSF bailout mechanism at this weekend’s EU Summit, where expectations for real progress were virtually nil. While the bonds for the most peripheral countries remain unloved at the moment (due to the fact that mention is made in the new deal about possible purchase of bonds in the primary rather than secondary market), the yields on Spanish and Italian bonds has fallen dramatically on the weekend’s events. Elsewhere, the USD is neutral and the pro-cylical currencies like CAD, AUD, NZD and SEK are trading on the weak side.
Chart: AUDJPY
The pro-risk currencies are trading weaker today as the true extent of the disaster in Japan becomes evident. Meanwhile, the market can’t decided whether to buy the yen on repatriation flows aimed at paying for the damage or sell it due to the frightening fiscal picture for the country. The bond-ratings agencies are avoiding making comments at this time, but the market will make its own estimates well in advance. From a technical angle, the pair looks fairly ugly, but it has looked this way on numerous occasions in recent months and the sell-offs never seem to catch hold.
The pro-risk currencies are trading weaker today as the true extent of the disaster in Japan becomes evident. Meanwhile, the market can’t decided whether to buy the yen on repatriation flows aimed at paying for the damage or sell it due to the frightening fiscal picture for the country. The bond-ratings agencies are avoiding making comments at this time, but the market will make its own estimates well in advance. From a technical angle, the pair looks fairly ugly, but it has looked this way on numerous occasions in recent months and the sell-offs never seem to catch hold.
Chart: EURCAD
The likes of EUR/commodity currencies are doing well after the weekend’s positive developments for Europe while risk appetite is shying away from the pro-cyclical currencies. Can the Euro outperform the likes of the Canadian dollar here? Interest rate spreads and the development in PIGS debt seem to suggest that the answer is why not?
The likes of EUR/commodity currencies are doing well after the weekend’s positive developments for Europe while risk appetite is shying away from the pro-cyclical currencies. Can the Euro outperform the likes of the Canadian dollar here? Interest rate spreads and the development in PIGS debt seem to suggest that the answer is why not?
It is interesting to note that US treasuries have popped back to the higher end of the range after yields at the long end of the curve in the US fell to their lowest level since late January on Friday. Risk aversion is suddenly a risk again despite Friday’s head-spinning turnaround and strong close. The nuclear reactor situation in Japan is still unstable and the Middle East situation continues to burn as well, with Libya’s pro-Gadhafi forces continuing to gain the upper hand (we have maintained that a Gadhafi victory is the same as effectively taking all of Libya’s oil off-line, since European/Western powers would inevitably enact sanctions. And Saudi troops are entering Bahrain.
Now more than ever, let’s all stay careful out there. FX volatility is finally responding to what is going on in the world and side swings could be in store.
Economic Data Highlights
- EuroZone Jan. Industrial Production out at +0.3% MoM and +6.6% YoY vs. +0.3%/+6.5% expected, respectively and vs. +8.8% YoY in Dec.
- Canada Q4 Capacity Utilization rose out at 76.4% vs. 76.2% in Q3
Upcoming Economic Calendar Highlights (all times GMT)
- Australia Mar. RBA Meeting Minutes (0030)
- Australia Feb. New Motor Vehicle Sales (0030)
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