A strong UK services PMI lit a fire underneath the British pounds, as complacent shorts scrambled for the exits. Is a top now in place in EURGBP? Also, the USD is a bit stronger after Bernanke was out with slightly more hawkish rhetoric than we are used to. Whither the USD here?
RBA
The RBA was out with no change to its 4.75% rate as widely expected. After the recent extremely sharp rally in the Aussie almost across the board (only exception within the G-10 has been the NZD), Stevens and company were happy to leave the rate unchanged and suggested that the current policy rate is “mildly restrictive” and were satisfied that the strong Aussie was taking the wind out of inflation risks. An ugly trade balance number showing a small deficit rather than a large surplus also weighed a bit on the Aussie, though the market may try to write this off as a result of the recent floods. Another very weak services survey is an additional worry for the currency as Aussie economic fundamentals continue to erode as the market buoys the currency to nosebleed levels. It’s a remarkable situation.
The RBA was out with no change to its 4.75% rate as widely expected. After the recent extremely sharp rally in the Aussie almost across the board (only exception within the G-10 has been the NZD), Stevens and company were happy to leave the rate unchanged and suggested that the current policy rate is “mildly restrictive” and were satisfied that the strong Aussie was taking the wind out of inflation risks. An ugly trade balance number showing a small deficit rather than a large surplus also weighed a bit on the Aussie, though the market may try to write this off as a result of the recent floods. Another very weak services survey is an additional worry for the currency as Aussie economic fundamentals continue to erode as the market buoys the currency to nosebleed levels. It’s a remarkable situation.
Chart: AUDUSD
The Aussie was a bit lower in the wake of the RBA meeting, but it was hardly a washout, as the outlook remains dominated by the latest uptick in BHP stock and risk appetite and metals prices. The first major level that must be challenged for the bears to get their claws into this pair is the 1.0200 level that was so interesting on the way up.
The Aussie was a bit lower in the wake of the RBA meeting, but it was hardly a washout, as the outlook remains dominated by the latest uptick in BHP stock and risk appetite and metals prices. The first major level that must be challenged for the bears to get their claws into this pair is the 1.0200 level that was so interesting on the way up.
Bernanke speech
Bernanke was out late yesterday with a speech in which he made a few noises about inflation, saying that it must be monitored “extremely closely.”, though he couched the caution with expressions of confidence that the commodity price rises of late would be transitory. One wonders if he is assuming that the 2008 ramp and collapse in commodity prices will repeat itself. Still, the overall expression of caution is a notch higher than anything we’ve seen of late from the Fed chairman as he has now been forced, no matter to how small a degree, to recognize the spike in input costs. Other parts of his non-policy related speech yesterday saw fairly strong warnings on the trajectory of the US budget deficit and the risks from global imbalances. The wording on the potential for calamity from long term deficit issues was particularly stark, as he said that the failure to address long term deficit problems could hamper growth and even trigger a crisis.
Bernanke was out late yesterday with a speech in which he made a few noises about inflation, saying that it must be monitored “extremely closely.”, though he couched the caution with expressions of confidence that the commodity price rises of late would be transitory. One wonders if he is assuming that the 2008 ramp and collapse in commodity prices will repeat itself. Still, the overall expression of caution is a notch higher than anything we’ve seen of late from the Fed chairman as he has now been forced, no matter to how small a degree, to recognize the spike in input costs. Other parts of his non-policy related speech yesterday saw fairly strong warnings on the trajectory of the US budget deficit and the risks from global imbalances. The wording on the potential for calamity from long term deficit issues was particularly stark, as he said that the failure to address long term deficit problems could hamper growth and even trigger a crisis.
Geithner and debt ceiling/government shutdown
US Treasury Secretary Geithner was out yesterday suggesting that the legislated government debt ceiling for the US will be reached already by mid-May and that Congress must raise the ceiling once again or Americans will face “severe hardships” . We may have perhaps conflated the debt ceiling issue with the budget issue (which is nearing a head by this Friday’s deadline), but either issue will lead to a US government “shutdown” if not addressed by Congress. Supposedly, in a government shutdown, payments to military personnel, retirees and others (unemployment benefits for example?) would be suspended, not to mention “non-vital” government workers.
US Treasury Secretary Geithner was out yesterday suggesting that the legislated government debt ceiling for the US will be reached already by mid-May and that Congress must raise the ceiling once again or Americans will face “severe hardships” . We may have perhaps conflated the debt ceiling issue with the budget issue (which is nearing a head by this Friday’s deadline), but either issue will lead to a US government “shutdown” if not addressed by Congress. Supposedly, in a government shutdown, payments to military personnel, retirees and others (unemployment benefits for example?) would be suspended, not to mention “non-vital” government workers.
Odds and ends
New Zealand’s finance minister Bill English was positive on the outlook for New Zealand business confidence despite the massive drop in Q1 triggered by the second Christchurch earthquake. He also said that further rate cuts were unlikely to be necessary, and this boosted the kiwi once again as the likelihood that the recent 50-bp cut in the RBNZ rate was a case of “one and done”. Note that NZDUSD is approaching a key descending trendline on the daily chart as it approaches the 0.7700 level.
New Zealand’s finance minister Bill English was positive on the outlook for New Zealand business confidence despite the massive drop in Q1 triggered by the second Christchurch earthquake. He also said that further rate cuts were unlikely to be necessary, and this boosted the kiwi once again as the likelihood that the recent 50-bp cut in the RBNZ rate was a case of “one and done”. Note that NZDUSD is approaching a key descending trendline on the daily chart as it approaches the 0.7700 level.
China raised its interest rates once again to counter inflation pressure as it appears that the government is cracking down on lending and Chinese lending with the previous bank reserve requirements and now a series of interest rate hikes. But a series of article in ftalphaville, quoting researchers at major banks, suggests that the gray financial system in China is enormous and continues to allow tremendous lending activity and money growth outside of the large banks. Much of this gray lending system is built on a bizarre system of using warehoused copper as leverage. This latter phenomenon is one of those areas we will have to watch for the potential for massive disruption, since a sudden rush of enormous quantities of physical copper to the market is a huge risk, not only for the Chinese financial system, but for currencies like the Aussie as well.
The British pound made a strong move against the market in the European session today, with a strong Services PMI apparently serving as the catalyst after a recent spate of somewhat weak data points and perhaps complacent GBP bears were shocked to attention. Weak EuroZone retail sales and the ongoing plunge in Portugal’s government debt did little to help the Euro’s case in today’s trade. The recent action and today’s follow-up suggest that EURGBP may have put in a significant top for now.
Chart: EURGBP
EURGBP began trading choppily a few days ago, and today’s UK Services PMI saw the first strong impulse lower that suggest the bulls may have overstayed their welcome. The next are of interest comes in around the old highs at 0.8675. If the pair manages to work its way back below there on the other side of the Thursday central bank meetings, it could suggest a strong cap is in place on the pair and a return to the lower part of the longer term range back toward 0.8400.
EURGBP began trading choppily a few days ago, and today’s UK Services PMI saw the first strong impulse lower that suggest the bulls may have overstayed their welcome. The next are of interest comes in around the old highs at 0.8675. If the pair manages to work its way back below there on the other side of the Thursday central bank meetings, it could suggest a strong cap is in place on the pair and a return to the lower part of the longer term range back toward 0.8400.
Looking ahead
We have a parade of Fed official out speaking later today, some of them attending the same event in Georgia. The divide between the doves and hawks on the FOMC is becoming more stark by the day and this is setting up a very interesting two-day meeting later this month leading up to the new monetary policy statement on April 27. Stay tuned. For the USD to get the upper hand here, it appears we need to see the negative spotlight shifting to the Euro or for the Fed hawks to appear far more ascendant than we have seen thus far.
We have a parade of Fed official out speaking later today, some of them attending the same event in Georgia. The divide between the doves and hawks on the FOMC is becoming more stark by the day and this is setting up a very interesting two-day meeting later this month leading up to the new monetary policy statement on April 27. Stay tuned. For the USD to get the upper hand here, it appears we need to see the negative spotlight shifting to the Euro or for the Fed hawks to appear far more ascendant than we have seen thus far.
We also have the US ISM Non-manufacturing survey out for March. The February reading was close to the highest level the index reached in its best months in the 2003-05 period. We’ve also got the UK BRC Shop Price Index up later, which has risen to its highest levels since 2008.
Still plenty to grapple with for the rest of the week, as we await the BoE/ECB meetings on Thursday (assumption is that BoE doesn’t alter rates and that the ECB will hike). Keep in mind that oil prices are already at record highs expressed in British pounds, and one wonders if there is an outside chance at a surprise from the BoE on Thursday even though the vast majority are looking for the first hike to come later.
Stay careful out there.
Economic Data Highlights
- New Zealand Q1 NZIER Business Opinion Survey out at -27 vs. 8 in Q4
- Australia Mar. AiG Performance of Services survey out at 46.5 vs. 48.7 expected
- Australia Feb. Trade Balance out at -205M vs. 1200M expected and 1433M in Jan.
- Australia RBA left Cash Target unchanged at 4.75% as expected
- UK Mar. Services PMI out at 57.1 vs. 52.6 expected and 52.6 in Feb.
- EuroZone Feb. Retail Sales out at -0.1% MoM and +0.1% YoY vs. +0.1%/+0.6% expected and vs. +0.7% YoY in Jan.
Upcoming Economic Data Highlights
- US Mar. ISM Non-manufacturing (1400)
- US Fed’s Lockhart to Speak (1645)
- US Fed’s Kocherlakota to Speak (1645)
- US Fed’s Plosser to Speak (1700)
- US Fed FOMC Minutes from March 15 meeting (1800)
- US Weekly API Crude Oil and Product Inventories (2030)
- UK Mar. BRC Shop Price Index (2301)
- Australia Feb. Home Loans (0130)
- China Mar. HSBC Services PMI (0230)
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