The Aussie is maintaining incredible composure considering other intermarket factors that would have normally seen it correcting sharply over the last couple of sessions. What gives? Also, when does support come in for USDJPY?
US Budget Battle
The president’s budget speech yesterday was rather interesting as it saw a fairly aggressive president trying to shore up some of his more traditionally “liberal” credentials in announcing his budget, promising to raise taxes back to the pre-Bush era tax cuts and lambasting the Republican plan by suggesting that their plans to continue or increase tax cuts for wealthier taxpayers will come at the cost of medical and pension benefits for the less well off. While Obama has made a sharp move to the center since the mid-term election defeat, this was not a centrist speech, but one aimed at the traditional Democratic constituency. The Republican response will be very far away from this initial move by Obama and the question is where and whether there is a middle ground. There will have to be - Obama has discussed cutting $4 trillion over 12 years (probably including optimistic tax revenue projections) The number needs to be more like $15 trillion or more - and that's withouth unrealistic revenue projections.
The president’s budget speech yesterday was rather interesting as it saw a fairly aggressive president trying to shore up some of his more traditionally “liberal” credentials in announcing his budget, promising to raise taxes back to the pre-Bush era tax cuts and lambasting the Republican plan by suggesting that their plans to continue or increase tax cuts for wealthier taxpayers will come at the cost of medical and pension benefits for the less well off. While Obama has made a sharp move to the center since the mid-term election defeat, this was not a centrist speech, but one aimed at the traditional Democratic constituency. The Republican response will be very far away from this initial move by Obama and the question is where and whether there is a middle ground. There will have to be - Obama has discussed cutting $4 trillion over 12 years (probably including optimistic tax revenue projections) The number needs to be more like $15 trillion or more - and that's withouth unrealistic revenue projections.
US 10-year auction and USDJPY
Even before the US 10-year auction yesterday, US treasuries had rallied strongly, and despite a less enthusiastic bid at the auction, treasuries maintained an even keel and have rallied strongly again into today’s early US session, adding even further to gains after the ugly jobless claims release. The strong bid in US treasuries is seeing the usual consequence – a rally in the JPY, as we look at in the chart below.
Even before the US 10-year auction yesterday, US treasuries had rallied strongly, and despite a less enthusiastic bid at the auction, treasuries maintained an even keel and have rallied strongly again into today’s early US session, adding even further to gains after the ugly jobless claims release. The strong bid in US treasuries is seeing the usual consequence – a rally in the JPY, as we look at in the chart below.
Chart: USDJPY
The USDJPY sell-off cut right through the 200-day moving average on the pressure from the bond rally, which is helping to throw the JPY a lifeline on shrinking interest rate spreads. With weak JPY shorts heading for the exits, we look at where the next support might materialize. It appears that the 82.50 area is an important one, containing both the 55-day moving average, which has been important at times, and the daily Ichimoku cloud, which holds technical sway in Japan. Keep an eye on this level as the more patient JPY bears are probably out there looking for new entry points.
The USDJPY sell-off cut right through the 200-day moving average on the pressure from the bond rally, which is helping to throw the JPY a lifeline on shrinking interest rate spreads. With weak JPY shorts heading for the exits, we look at where the next support might materialize. It appears that the 82.50 area is an important one, containing both the 55-day moving average, which has been important at times, and the daily Ichimoku cloud, which holds technical sway in Japan. Keep an eye on this level as the more patient JPY bears are probably out there looking for new entry points.
AUD doing its own thing
It’s more than a bit odd to see AUD not correcting more deeply considering inter-market factors that nearly always coincide with weakness in the currency. On the one hand, we can perhaps write off, for example, the fact that the currency pair has not tracked interest rate spreads very closely of late due to the idea that the RBA is simply allowing currency appreciation to do the heavy lifting in fighting inflation rather than further policy tightening, then the two can diverge for a time. But over the last few sessions we have seen more distinctly negative factors like a fairly steep sell-off in risk that has seen a chunky correction in equity markets – both emerging and developed – and we’ve seen a sizable correction in the price of copper – aggravated a bit yesterday by news that Goldman Sachs is abandoning its long copper trade (there have also been the reports about the bizarre use of massive amounts of idle, warehoused copper as collateral for loans in what amounts to a non-official banking system in China).
It’s more than a bit odd to see AUD not correcting more deeply considering inter-market factors that nearly always coincide with weakness in the currency. On the one hand, we can perhaps write off, for example, the fact that the currency pair has not tracked interest rate spreads very closely of late due to the idea that the RBA is simply allowing currency appreciation to do the heavy lifting in fighting inflation rather than further policy tightening, then the two can diverge for a time. But over the last few sessions we have seen more distinctly negative factors like a fairly steep sell-off in risk that has seen a chunky correction in equity markets – both emerging and developed – and we’ve seen a sizable correction in the price of copper – aggravated a bit yesterday by news that Goldman Sachs is abandoning its long copper trade (there have also been the reports about the bizarre use of massive amounts of idle, warehoused copper as collateral for loans in what amounts to a non-official banking system in China).
Yet Aussie is trading at 1.0500 today, a mere 80 pips off its recent high for the cycle. This looks odd. One wild stab at a suggestion of what is going on is that the Aussie is becoming more popular among central bank reserve managers as an alternative reserve currency. There was recent news to this effect for the Australian and Canadian dollars and if that is the case, then the divergence from normal “indicators” can continue for as long as central bank reserve managers keep their bids in place. Given the inter-market environment, the Aussie (and kiwi) look more than a bit pricey at these levels. Keep in mind as well, that AUDUSD and BHP Billiton stock have a 0.96 correlation for the last 1000 trading days, in case anyone’s in doubt on whether the Aussie is a commodity currency.
Looking ahead
Today sees the final US treasury auction of the week, as 30-year T-bonds go on the block. Their yield advantage over 10-year debt has fallen sharply of late, so the auction doesn’t look set to be a barn-burner. The aftermath of that auction is likely to tell us in the coming couple of days whether the bond sell-off is now behind us and we are going to stay in a range or whether we see the old downtrend reconfirmed with a strong rejection of the recent rally. This is important, as we suggest above, for seeing whether USDJPY finds support around key technical levels.
Today sees the final US treasury auction of the week, as 30-year T-bonds go on the block. Their yield advantage over 10-year debt has fallen sharply of late, so the auction doesn’t look set to be a barn-burner. The aftermath of that auction is likely to tell us in the coming couple of days whether the bond sell-off is now behind us and we are going to stay in a range or whether we see the old downtrend reconfirmed with a strong rejection of the recent rally. This is important, as we suggest above, for seeing whether USDJPY finds support around key technical levels.
This US weekly jobless claims number is downright awful – though we have to consider all of the usual caveats with a high frequency number that could just revert sharply next week. But if we get other ugly numbers out of the US in coming days (especially another ugly weekly claims figure next week) it will be interesting to see if the market gets depressed or tries to celebrate with the hope that QE3 will quickly materialize in the wake of the end of QE2 – which ends a mere 77 days from now.
On the economic calendar, watch for heavy flow of Chinese numbers tonight, for whatever they’re worth. Tomorrow is the final test of the week for the USD and the Fed view as we see the CPI data for the month (pretty firm signs that the core CPI has bottomed out) and inflation expectations for the US University of Michigan confidence survey, which have rocketed higher in recent months. Of course, Chairman Ben would probably want to write it off as a “transitory” response to gasoline prices that he doesn’t see being “embedded” in people’s minds until everyone is cycling to work and gasoline costs 50 dollars a gallon.
On the economic calendar, watch for heavy flow of Chinese numbers tonight, for whatever they’re worth. Tomorrow is the final test of the week for the USD and the Fed view as we see the CPI data for the month (pretty firm signs that the core CPI has bottomed out) and inflation expectations for the US University of Michigan confidence survey, which have rocketed higher in recent months. Of course, Chairman Ben would probably want to write it off as a “transitory” response to gasoline prices that he doesn’t see being “embedded” in people’s minds until everyone is cycling to work and gasoline costs 50 dollars a gallon.
e careful out there – this market is making me snappish and, well, just downright angy – usually a sign that something big is about to happen…or is it just my personality? We shall see….
Economic Data Highlights
- New Zealand Mar. Business PMI out at 50.1 vs. 53.2 in Feb.
- UK Mar. Nationwide Consumer Confidence out at 44 vs. 40 expected and 39 in Feb.
- Australia Apr. Consumer Inflation Expectations out at +3.5% vs. 3.6% in Mar.
- Australia Mar. New Motor Vehicle Sales out at +3.4% MoM and +1.9% YoY vs. -1.5% YoY in Feb.
- New Zealand Mar. Non-resident Bond Holdings out at 62.8% vs. 63.1% in Feb.
- China Mar. New Yuan Loans out at 679.4B vs. 600B expected and 535.6B in Feb.
- Norway Q1 Existing Home Sales rose +5.1% QoQ vs. -0.1% QoQ in Q4
- Switzerland Apr. Credit Suisse ZEW Survey out at 8.8 vs. -13.5 in Mar.
- Canada Feb. Manufacturing Sales out at -1.5% MoM vs. -0.5% expected and +4.4% in Jan.
- US Weekly Jobless Claims out at 412k vs. 380k expected and 385k last week
- US Weekly Continuing Claims out at 3680k vs. 3705k expected and 3738k last week
- US Mar. Producer Price Index out at +0.7% MoM and +5.8% YoY vs. +1.0%/+6.1% expected, respectively and vs. +5.6% YoY in Feb.
- US Mar. PPI ex Food and Energy out at +0.3% MoM and +1.9% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.8% YoY in Feb.
Upcoming Economic Calendar Highlights (all times GMT)
- US Fed’s Kocherlakota to Speak (1320)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US Fed’s Liang to Testify on Financial Stability Oversight Council (1400)
- US Fed’s Plosser to Speak (1630)
- US Fed’s Tarullo to Speak (1715)
- US Fed’s Lacker to Speak (2245)
- UK BoE’s Tucker to Speak (2305)
- China Q1 Real GDP (0200)
- China Mar. CPI (0200)
- China Mar. Industrial Production (0200)
- China Mar. Retail Sales (0200)
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