The USD is having a hard time finding any buyers with higher crude oil prices and a broad risk rally kicking off this week after last Friday’s relatively disappointing jobs report. Is there anything on the horizon that can lend the greenback a hand?
The FX market is following through on last week’s theme of surging interest rate spreads moving against the USD as well as the development in crude oil prices, as we march back to the highs for this cycle again there. The latest leg of USD selling is not particularly justified from the angle of interest rate spreads, but these have not improved at all in the USD’s favor, and to add insult to injury for the greenback, risk appetite is starting off the week with a rip-roaring rally in Asia and early Europe. After all, what does 118-dollar Brent crude tell the global investor out there besides “Buy the dip!” ??
Bond ratings downgrades to Greece and Spain – so what?
The market highlighted the irrelevance of Moodys’ and other bond rating agencies’ official announcements on sovereign debt ratings as the negative credit watch move on Spain on Friday by Fitch and Greece today by Moody’s was met with a collective shrug and hardly dented the enthusiasm for buying more Euros. The current situation suggests that the most peripheral of the PIGS (Portugal, Ireland and Greece) are allowed to struggle all they want to, as long as the situation for the likes of Italy and Spain remain stable, which it has as judged by rate spreads. But we wonder if the market has the eye on the ball here with the Euro as each day takes us close to the critical summit later this month and few signs point to any broad political consensus on action among EU officials. EURUSD may get a nosebleed soon. See this Bloomberg article on “political discord” within the EU:
The market highlighted the irrelevance of Moodys’ and other bond rating agencies’ official announcements on sovereign debt ratings as the negative credit watch move on Spain on Friday by Fitch and Greece today by Moody’s was met with a collective shrug and hardly dented the enthusiasm for buying more Euros. The current situation suggests that the most peripheral of the PIGS (Portugal, Ireland and Greece) are allowed to struggle all they want to, as long as the situation for the likes of Italy and Spain remain stable, which it has as judged by rate spreads. But we wonder if the market has the eye on the ball here with the Euro as each day takes us close to the critical summit later this month and few signs point to any broad political consensus on action among EU officials. EURUSD may get a nosebleed soon. See this Bloomberg article on “political discord” within the EU:
Odds and ends
The Australian construction survey suggests that the building market has contracted for 9 months running, and spreads continue to suggest that the Aussie should be going nowhere fast. Is it time to look at fading the AUDNZD rally from the NZ earthquake?
The Australian construction survey suggests that the building market has contracted for 9 months running, and spreads continue to suggest that the Aussie should be going nowhere fast. Is it time to look at fading the AUDNZD rally from the NZ earthquake?
Canadian Building Permits were very weak with a -5.1% drop, and the activity level there smoothed over the last several months suggests the housing market is in danger of a severe correction in the country with the world’s most over-leveraged consumer.
There is talk of the US dipping into its strategic petroleum reserve to deal with the current high oil prices. We can only ask – what if a much larger supplier than Libya goes offline – isn’t this premature? The political risks of such a move's timing are enormous.
A BoE nominee foresaw that the BoE would hike rates only once per quarter through the end of 2012 to fight inflation as GBPUSD struggled once again with maintaining the 1.6300 handle.
Read this analysis from Reuters of the struggles the Chinese regime faces in crafting its new 5-year plan. The regime’s policy moves are becoming more pronounced by the day as the country struggles with inflation and and a horrifically imbalanced economy:
Don’t be fooled by the rising Consumer Credit numbers coming out of the US over the last year or so – almost all of that “improvement” is from student loans moving their way into the data. The revolving debt portion of that data (mostly credit cards) only started to show some stabilization over the last couple of months after falling by well over 15% from mid-2008. The latest data (for January) is set for release later today.
Looking ahead
Looking ahead
US Treasury Auctions
This week we have a round of US treasury auctions from the US, of the 3-,10- and 30-year variety from Tuesday through Thursday. Some $66 billion of debt will go on the block. Last time around, precisely four weeks ago, we saw a poor 3-year auction coinciding with the highest yield levels for the cycle along the US curve. But the next day saw an extremely strong 10-year auction, with very heavy foreign interest, and the auction thus defined the bottom in the bond market/top in yields for the cycle. That development didn’t give the USD support for very long, as the focus since then has switched to the situation with oil prices and Fed credibility/petro-dollar diversification, but this is an interesting set of auctions to observe, nonetheless. Our suspicion is that demand for 3-year debt will remain anemic due to still low (80 bps inferior to German 3-year yield).
This week we have a round of US treasury auctions from the US, of the 3-,10- and 30-year variety from Tuesday through Thursday. Some $66 billion of debt will go on the block. Last time around, precisely four weeks ago, we saw a poor 3-year auction coinciding with the highest yield levels for the cycle along the US curve. But the next day saw an extremely strong 10-year auction, with very heavy foreign interest, and the auction thus defined the bottom in the bond market/top in yields for the cycle. That development didn’t give the USD support for very long, as the focus since then has switched to the situation with oil prices and Fed credibility/petro-dollar diversification, but this is an interesting set of auctions to observe, nonetheless. Our suspicion is that demand for 3-year debt will remain anemic due to still low (80 bps inferior to German 3-year yield).
The real interest comes with Wednesday’s 10-year auction, just like last time around. Is there still heavy interest now that yields have fallen 25 bps and with the worry that the situation in energy markets is creating here on the growth front? And what about the increasingly bulging coffers of the petrostates and the need for some place to put all of those funds? US long rates have come off more quickly than German rates in the latest cycle of falling interest rates at the longer end of the curve, and this despite CDS prices suggesting the default risk of the US relative to Germany has risen over the same time frame – a doubly negative development for the greenback. For the USD to make a comeback here, we clearly need for the market to throw a wet blanket on rate expectations globally, for risk appetite to take a very significant dive, and for oil prices to stabilize or even drop sharply as well. Until then, the currency is likely to remain on the defensive.
Chart: EURUSD and 10-year rate spread
The USD is having a hard time attracting buyers as long as rate spreads all along the cuver (the 10-year shown here) fail to offer any compelling reason to buy the currency, a situation that has been aggravated by the development in energy markets. We would suggest that the rate spread/energy situation is becoming symbiotic.
The USD is having a hard time attracting buyers as long as rate spreads all along the cuver (the 10-year shown here) fail to offer any compelling reason to buy the currency, a situation that has been aggravated by the development in energy markets. We would suggest that the rate spread/energy situation is becoming symbiotic.
Economic Data Highlights
- New Zealand Jan. Building Permits rose +9.6% MoM vs. -18.2% contraction in Dec.
- Australia Feb. AiG Performance of Construction Index out at 44.6 vs. 40.2 in Jan.
- Norway Jan. Industrial Production fell -2.7% MoM and -6.4% YoY vs. -2.7% YoY in Dec.
- Norway Jan. Industrial Product Manufacturing rose +0.6% MoM and +3.3% YoY vs. +0.9%/+3.5% expected, respectively and vs. +2.1% YoY in Dec.
- EuroZone Mar. Sentix Investor Confidence out at 17.1 vs. 17.2 expected and 16.7 in Feb.
- Canada Jan. Building Permits out at -5.1% MoM vs. +0.5% expected and +2.6% MoM in Dec.
Upcoming Economic Calendar Highlights (all times GMT)
- US Fed’s Fisher to Speak (1415)
- US Jan. Consumer Credit (2000)
- Japan Jan. Current Account (2350)
- UK Feb. BRC Sales (0001)
- UK Feb. RICS House Price Balance (0001)
- Australia Feb. NAB Business Conditions/Confidence (0030)
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