While risk managed to bounce back from the brink yesterday, we are still in a key inflection zone for the EURUSD and AUDUSD and equity markets. As well, sovereign debt spreads suggest that the pressure remains on the Euro for now.
Yesterday we asked if it was time for AUDUSD to have a go below 1.05 as the USD and equities remain posed at critical inflection points. Key support was tried on the day yesterday, but risk made a stand after a test of support. The subsequent bounce has been underwhelming and the 1.05 break scenario remains in play if the market can’t stage a more impressive rally. There seems to be a dearth of catalysts here for the market to react to, almost as if this market at present remains a pure test of sentiment.
Chart: EURUSD
The EURUSD sell-off has lost plenty of momentum over the last couple of days, though the bounce has been underwhelming, perhaps suggestive a heavy overhang of still nervous sentiment. Intra Euro-zone spreads on European debt have headed a bit wider today (particularly for Spain), so as long as we don’t see a rally in risk/commodities, the pressure would seem to remain on the EURUSD for a further sell-off towards that key 1.40 level, and beyond that possible to the 200-day moving average (black line). To the upside, the short term focus is clearly the 55-day moving average just under 1.4300.
The EURUSD sell-off has lost plenty of momentum over the last couple of days, though the bounce has been underwhelming, perhaps suggestive a heavy overhang of still nervous sentiment. Intra Euro-zone spreads on European debt have headed a bit wider today (particularly for Spain), so as long as we don’t see a rally in risk/commodities, the pressure would seem to remain on the EURUSD for a further sell-off towards that key 1.40 level, and beyond that possible to the 200-day moving average (black line). To the upside, the short term focus is clearly the 55-day moving average just under 1.4300.
Odds and Ends
UK data today
The Bank of England minutes showed the MPC voting in the same patterns we have seen at the previous three meetings, with three in favor of a rate increase and a lone hawk in favor of increasing the asset purchase target. There was little surprise in general in the minutes, with uncertainty expressed everywhere and the main meme that near term inflation must be looked through, though there was some chatter that one member might cross the aisle to the hawkish side. This did not materialize, so the release is slightly bearish for GBP, though the weak jobless claims numbers released today carry more bearish weight as the March data was revised higher and the April claims number was the highest since early 2010. The BoE will sight tight for a long time if unemployment begins to ratchet higher in coming months.
The Bank of England minutes showed the MPC voting in the same patterns we have seen at the previous three meetings, with three in favor of a rate increase and a lone hawk in favor of increasing the asset purchase target. There was little surprise in general in the minutes, with uncertainty expressed everywhere and the main meme that near term inflation must be looked through, though there was some chatter that one member might cross the aisle to the hawkish side. This did not materialize, so the release is slightly bearish for GBP, though the weak jobless claims numbers released today carry more bearish weight as the March data was revised higher and the April claims number was the highest since early 2010. The BoE will sight tight for a long time if unemployment begins to ratchet higher in coming months.
Aussie takes a hit
Aussie was relatively weak in the crosses overnight Important news from Down Under as Moody’s downgraded a couple of Australian banks to AA2, though with a stable outlook. While the market is likely to ignore this kind of thing beyond the immediate headline release, it is important to realize that there is an economy behind the correlations of the currency with risk appetite and commodity prices. And there are signs that this economy is rolling over in a big way outside of the booming mining sector. Consumer Confidence also fell slightly in April and was its lowest since last June (and second worst since June of 2009)
JPY M&A
The yen moves on bond market moves and risk appetite, but recently, a big M&A deal may also be moving the currency, as Takeda Pharmaceutical is looking at an approx. $12 billion takeover of Swiss drugmaker Nycomed. As an isolated factor, this is JPY bearish in the near term.
Aussie was relatively weak in the crosses overnight Important news from Down Under as Moody’s downgraded a couple of Australian banks to AA2, though with a stable outlook. While the market is likely to ignore this kind of thing beyond the immediate headline release, it is important to realize that there is an economy behind the correlations of the currency with risk appetite and commodity prices. And there are signs that this economy is rolling over in a big way outside of the booming mining sector. Consumer Confidence also fell slightly in April and was its lowest since last June (and second worst since June of 2009)
JPY M&A
The yen moves on bond market moves and risk appetite, but recently, a big M&A deal may also be moving the currency, as Takeda Pharmaceutical is looking at an approx. $12 billion takeover of Swiss drugmaker Nycomed. As an isolated factor, this is JPY bearish in the near term.
Looking ahead
Later today, look for the FOMC minutes to see if they reveal anything interesting. It seems expectations surrounding Fed rhetoric have virtually gone dead of late – we saw a flurry of hawkish pronouncements earlier this year from a sizable minority of Fed voters, including even arguments for exiting QE2 early and rate hikes, and yet these same supposed hawks voted unanimously for the most recent decision. Now, with further evidence of a softening economy, expectations for the Fed are virtually nil and the focus is on how the market reacts to the end of QE2 and the liquidity withdrawal it represents. And looking at the withdrawal of liquidity as a more global issue. Year forward expectations for the Fed are back down to the +25 bps area.
Later today, look for the FOMC minutes to see if they reveal anything interesting. It seems expectations surrounding Fed rhetoric have virtually gone dead of late – we saw a flurry of hawkish pronouncements earlier this year from a sizable minority of Fed voters, including even arguments for exiting QE2 early and rate hikes, and yet these same supposed hawks voted unanimously for the most recent decision. Now, with further evidence of a softening economy, expectations for the Fed are virtually nil and the focus is on how the market reacts to the end of QE2 and the liquidity withdrawal it represents. And looking at the withdrawal of liquidity as a more global issue. Year forward expectations for the Fed are back down to the +25 bps area.
Tonight, look out for Japan’s release of nationwide department store sales. This number gives an impression of how big a hole the terrible aftermath of the March earthquake has torn a hole in the Japanese economy. Expectations are running around -15% YoY for the nation as a whole and worse than -20% for Tokyo. It’s interesting simultaneously to see that the market is looking past the weakness in the domestic economy and bidding up the Japanese Yen on the implications for rate spreads of falling bond rates and the potential for (market positioning has suggested the continued JPY strength is a pain trade as well). Still, there are signs that the country is turning the corner and there will be a lot of bustling activity from short term pent-up demand and heavy rebuilding needs that will boost some measurements of activity in quarters to come.
While the USD still continues to thrive when risk is off, it is tough to like the currency with budget talks going nowhere this week. And yesterday, the so-called “Gang of six”, a bipartisan group of six US senators working on a budget compromise, lost a member as Republican Senator Coburn walked out on the talks. This entitlement issue is going to be one tough nut to crack. The population wants something for nothing and which politician will be able to deliver the message that they can’t have that without risking getting the boot at the next election. This is the reason, of course, that democracies seem to need crisis before anything can change.
Be careful out there.
Economic Data Highlights
- New Zealand Q1 Producer Price Inputs/Outputs out at +2.2%/+1.7% QoQ, respectively and vs. +0.9%/+0.2% in Q4
- Australia May Westpac Consumer Confidence out at 103.9 vs. 105.3 in Apr.
- New Zealand ANZ Consumer Confidence out at 103.3 vs. 101.4 in Apr.
- Australia Q1 Wage Index out at +0.8% QoQ and +3.8% YoY vs. +1.1%/+4.0% expected, respectively and vs. +3.9% YoY in Q4
- Japan Apr. Tokyo Condominium Sales fell -27.3% MoM
- UK Apr. Jobless Claims Change out at +12.4k vs. 0.0k expected and 6.4k in Mar.
- UK Mar. Average Weekly Earnings ex Bonus out at +2.1% 3M-YoY vs. 2.2% expected and 2.2% in Feb.
- EuroZone Mar. Construction Output out at -4.9% YoY vs. +3.9% in Feb.
- Canada Apr. Leading Indicators rose +0.8% MoM vs. +0.6% expected
- Canada Mar. Wholesale Sales rose +0.1% MoM vs. +1.2% expected
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- US Fed releases FOMC Minutes (1800)
- US Fed’s Bullard to Speak in New York (2300)
- UK Apr. Nationwide Consumer Confidence (2301)
- Japan Q1 GDP (2350)
- Australia Feb. Average Weekly Wages (0130)
- Japan Mar. Capacity Utilization (0430)
- Japan Apr. Nationwide Department Store Sales (0530)
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