Trichet wants an EU-wide finance ministry and the Euro jumped to attention on the news and rallied sharply. Elsewhere, enthusiasm for the USD seems to fade as long as soon as the finger is lifted from the panic button.
Market action today
There seems to be an asymmetry in the market moves of late – if traders can bring enough fear and loathing to the table, the expected correlations take hold and the dollar can rally smartly – much like the latter half of yesterday’s US session. But it often seems the case that when the white knuckled trading zone eases off and the market consolidates – almost no matter how slightly – the USD can’t maintain its gains very well. Of course, in today’s instance, we had the rather whiplash-inducing news of Trichet’s EU finance ministry idea, which saw EURUSD taking back all of yesterday’s losses in EURUSD and then some and likewise for EURGBP. Sovereign debt spreads responded smartly as well, both to the Trichet news and to a relatively strong Spanish bond auction (though participation in these would be interesting to observe without the ECB’s presence…).
There seems to be an asymmetry in the market moves of late – if traders can bring enough fear and loathing to the table, the expected correlations take hold and the dollar can rally smartly – much like the latter half of yesterday’s US session. But it often seems the case that when the white knuckled trading zone eases off and the market consolidates – almost no matter how slightly – the USD can’t maintain its gains very well. Of course, in today’s instance, we had the rather whiplash-inducing news of Trichet’s EU finance ministry idea, which saw EURUSD taking back all of yesterday’s losses in EURUSD and then some and likewise for EURGBP. Sovereign debt spreads responded smartly as well, both to the Trichet news and to a relatively strong Spanish bond auction (though participation in these would be interesting to observe without the ECB’s presence…).
As for the US dollar’s moves here – it appears that only “blood in the streets” can really come to the currency’s aid at the moment – the interest rate spreads after the latest string of terrible data point mostly south for the currency, with the exception of USDCAD, where comments from the BoC yesterday saw a considerable fall in rate expectations and this combined with a sharp drop in oil prices during all of yesterday’s risk aversion saw USDCAD testing higher.
An EU Finance Ministry?
Trichet asked in a speech today: “Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?”. He also suggested that he would like for the EU to have the power to veto parts of an individual country’s budget if these are seen as “harmfully astray” of fiscal prudence. All of this is considered Euro positive because signs of collective action are needed to keep the extend and pretend game running on the sovereign debt/financial system stability issue in the short to medium term. But the EU has never been popular among its citizens. Recall the 2005 constitution debate and its rejection by a number of EU nations, including France. But EuroZone politicians have a habit of functioning as an elite that is rather tone deaf to popular demands – could they really make this happen? It is almost impossible to imagine populations voting in favor of more central control of their country. But for now, it is out there and the market likes it and it is assuming that we can move in orderly fashion into a sell-off of the family silver in Greece (national asset sales) to stave off a solvency crisis for another day. Let’s see if the next layer of resistance can hold in EURUSD – the 0.618 to 0.764 retracement zone between about 1.4570 and 1.4710.
Trichet asked in a speech today: “Would it be too bold, in the economic field, with a single market, a single currency and a single central bank, to envisage a ministry of finance of the union?”. He also suggested that he would like for the EU to have the power to veto parts of an individual country’s budget if these are seen as “harmfully astray” of fiscal prudence. All of this is considered Euro positive because signs of collective action are needed to keep the extend and pretend game running on the sovereign debt/financial system stability issue in the short to medium term. But the EU has never been popular among its citizens. Recall the 2005 constitution debate and its rejection by a number of EU nations, including France. But EuroZone politicians have a habit of functioning as an elite that is rather tone deaf to popular demands – could they really make this happen? It is almost impossible to imagine populations voting in favor of more central control of their country. But for now, it is out there and the market likes it and it is assuming that we can move in orderly fashion into a sell-off of the family silver in Greece (national asset sales) to stave off a solvency crisis for another day. Let’s see if the next layer of resistance can hold in EURUSD – the 0.618 to 0.764 retracement zone between about 1.4570 and 1.4710.
Chart: EURUSD
This market knows its technicals – as EURUSD closed right at the point of maximum uncertainty yesterday on the 55-day moving average, the 0.382 retracement line, and the important former resistance all in the 1.4350 area. The Trichet news saw the rally re-established, while the overall structure of the chart and the massive sell-off from early May still suggests that the most important resistance lies in the 0.618 and 0.764 (for which EURUSD seems, for whatever reason to have a particular affinity) retracements around 1.4570 and 1.4710, respectively. To the downside, we need to see that 55-day MA taken out on the close to build better arguments for a return to the lower end of the range.
This market knows its technicals – as EURUSD closed right at the point of maximum uncertainty yesterday on the 55-day moving average, the 0.382 retracement line, and the important former resistance all in the 1.4350 area. The Trichet news saw the rally re-established, while the overall structure of the chart and the massive sell-off from early May still suggests that the most important resistance lies in the 0.618 and 0.764 (for which EURUSD seems, for whatever reason to have a particular affinity) retracements around 1.4570 and 1.4710, respectively. To the downside, we need to see that 55-day MA taken out on the close to build better arguments for a return to the lower end of the range.
Odds and ends
Australian data overnight was mixed after a batch of weak data of late. On the positive side, retail sales rebounded sharply in the month of April after a weak March reading. The April Trade Balance, on the other hand, was a bit weaker than expected, with the main culprit behind the shortfall a drop in iron ore exports relative to March’s blowout number after February trade was disrupted by flooding. Looking at the mix of commodity exports, the top two are iron ore and coal, which together represent around AUD 8 billion per month in revenue, about a third of all Australia’s exports.
Australian data overnight was mixed after a batch of weak data of late. On the positive side, retail sales rebounded sharply in the month of April after a weak March reading. The April Trade Balance, on the other hand, was a bit weaker than expected, with the main culprit behind the shortfall a drop in iron ore exports relative to March’s blowout number after February trade was disrupted by flooding. Looking at the mix of commodity exports, the top two are iron ore and coal, which together represent around AUD 8 billion per month in revenue, about a third of all Australia’s exports.
ZeroHedge is out with a cynical - but probably quite accurate in its gist - take on the latest speech by the US Fed’s Yellen, who was out speaking late yesterday on the risks from possible excesses in the market for leveraged loans. As a general comment on the market, she stated that: “I’ve noticed some recent developments that warrant close attention, including indications of potentially stretched valuations in certain US financial markets and emerging signs that investors are reaching for yield.” If this view is shared by others at the Fed, it could be a sign that the Fed is willing to wait until it sees the whites of the equity market’s eyes before riding to the rescue (thus rendering QE3 anticipation at the present time premature.)
A piece from the WSJ’s Hilsenrath (who seems to sometimes serve as the unofficial leaker of the latest Fed thinking) today suggests that the Fed is comfortable with its policy as it stands and that the hurdle for QE3 is rather high. There isn’t much to take away from such an article, however, because as we saw last year, over a short few months, when it became painfully obvious that the economy was doing poorly as stimulus and easing faded, the Fed rhetoric changed from one of discussing exit strategies to one of how to print money most effectively. Trust the Fed to remain behind the curve, in other words.
Looking ahead
We got another weak jobless claims print today, which, combined with the weak ADP number from yesterday suggest that the private/nonfarm payrolls totals tomorrow will come in far weaker than the expectations of just a few weeks ago. It’s almost unheard of for the unemployment rate to rise again so quickly after posting a major high, but that fear may grip the markets if we see another dip in payrolls growth and a second rise in a row in the US employment rate tomorrow. Since the end of World War II, this only really happened once, when the late 70’s crunch extended into the early 1980’s as the US came to grips with its stagflationary demons (can one imagine due to a Fed-induced credit crunch? My, how times have changed).
We got another weak jobless claims print today, which, combined with the weak ADP number from yesterday suggest that the private/nonfarm payrolls totals tomorrow will come in far weaker than the expectations of just a few weeks ago. It’s almost unheard of for the unemployment rate to rise again so quickly after posting a major high, but that fear may grip the markets if we see another dip in payrolls growth and a second rise in a row in the US employment rate tomorrow. Since the end of World War II, this only really happened once, when the late 70’s crunch extended into the early 1980’s as the US came to grips with its stagflationary demons (can one imagine due to a Fed-induced credit crunch? My, how times have changed).
Also watch out for the global services PMI’s for May that begin rolling in during the Asian session (from Australia and China) and finish up with tomorrow’s critical US Non-manufacturing ISM 90 minutes after the employment report.
Hopefully, by the close on Friday, we can draw some conclusions about what this market wants to do with the greenback and risk appetite and particularly important for CHF and JPY, with interest rates. We’ve pushed into a key level at 3.0% on the EuroBund and US 10-year note – will Friday’s data see a consolidation there or acceleration? The volatility risk lies to the upside in rates in the shortest term, we presume. Stay tuned.
Economic Data Highlights
- Australia Apr. Retail Sales out at +1.1% MoM vs. +0.4% expected, and a-0.3% in Mar.
- Australia Apr. Trade Balance out at +1597M vs. +2000M expected and +1691M in Mar.
- UK May Construction PMI out at 54.0 vs. 53.5 expected and 53.3 in Apr.
- US Weekly Initial Jobless Claims out at 422k vs. 417k expected and 428k last week
- US Weekly Continuing Claims out at 3711k vs. 3675k expected and 3712k last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly Bloomberg Consumer Comfort Index (1345)
- US Apr.Factory Orders (1400)
- US Weekly DoE Crude Oil and Product Inventories (1500)
- New Zealand Apr. Building Permits (2245)
- Australia May AiG Performance of Services Industries (2330)
- China May Non-manufacturing PMI (0100)
- China May HSBC Services PMI (0230)
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