Financial Advisor

FX Update: A pivotal couple of weeks ahead.

It’s a slow day in FX as we see a return of the typical pattern: once the pressure on the panic button eases, the USD heads back south. Is there anything on the horizon that will end this pattern?
We’ve see this play before: an ugly close across risk markets drags the USD higher versus the pro-risk currencies and even across the board. Then, as the session ends – or in this case as a new week gets under way – the pause in the panic sees much of the USD strength effortlessly unwound with no real catalyst. It seems clear that the market needs something more significant to grasp onto – a catalyst of some kind, if the market is to be shocked out of its range and a new trend is to be established. It is tough to offer suggestions considering the uncertainty on so many fronts, but the coincidence of the end of QE2 at the end of this month and the EU meetings taking place next week suggest that the next two weeks of trading will be critical for the super-majors.
The baseline expectation for the situation with Greece and the EU is well expressed in this article from Bloomberg: “ECB and Germany may be forced to compromise.”. An even better and especially thorough look at the situation was published by Der Spiegel over the weekend: with the more provocative title “Politicians are ‘lying through their teeth’ on Greek Aid, in reference to a sampling of opinions from various newspapers commenting on the situation, of which the Financial Times Deutshcland offers the very pointed (and accurate) comment that everyone is “lying through their teeth” and that the “troika” (EU/ECB/IMF) should have provide analysis on “whether Greece has any chnce of getting back on its feet in the medium term with the help of loans. The fact that the troika has so far avoided carrying out that analysis can only mean one thing: That rescuers do not want to know the answer, because they fear the consequences of an inconvenient outcome.” Ouch. The truth hurts.
New Zealand aftershocks
Significant aftershocks in the Christchurch area of New Zealand rocked the kiwi for steep losses overnight after the currency has been on a tear lately and even managed to scratch out a new all-time high against the US dollar late last week. The developments (as well perhaps as the aftershocks of Friday’s ugly close in equity markets) saw about 12 bps taken out of the year forward expectations from the RBNZ.
EURCHF flirts with 1.20
With Trichet and German squaring off over the shape of the next Greek bailout– and doing so a full week before the EU finance ministers put their heads together at their next meeting – uncertainty surrounding the Euro continues to find expression in downside in the EURCHF and even EURGBP crosses. One has to wonder whether 1.20 barriers might be contributing to some of the volatility and price action in this area as well. It’s very important to note that the SNB’s quarterly rate targeting meeting is set for this Thursday and given the fearsome appreciation of the franc again in recent weeks, one wonders if the SNB and government are trying to cook up something out of the box to counter the move. The only other development that might support an easing off in franc strength would be a significant consolidation in bond markets.
Looking ahead
We’ve got some important data out of China tonight as the official release of the PPI and CPI data could tip the market off to the possible severity of anti-inflation measures to come from the Chinese government. (AUD is the G-10 proxy for CNY implications, it seems) Tomorrow we have the latest UK CPI release – will it ease off a bit now that fuel prices have fallen since their April peak? Versus an evenly weighted basket of the rest of the G-10 currencies, the GBP just missed posting an all time low last week.
Chart: GBPUSD
GBPUSD swooned on Friday as obvious support levels gave way, including the 55-day moving average. The significance of the move is somewhat in doubt today now that the pair has managed to rally all the way back to that MA despite an utter lack of developments save for the dead cat bounce in risk appetite. Watch for tonight’s RICS House Price Balance and tomorrow’s inflation release for a possible catalyst in GBP crosses.

Also tomorrow, we have the US PPI and Advance Retail Sales for May. The data out of the US economy has been pretty grim of late, but we have yet to post a negative (MoM) reading in Retail Sales since last summer. If the US economy is really headed south here, then retail sales numbers would need to be very weak as well.
Be careful out there.
Economic Data Highlights
  • Japan Apr. Machine Orders out at -3.3% MoM and -0.2% YoY vs. +1.7%/+4.9% expected, respectively and vs. +9.1% YoY in Mar.
  • China May New Yuan Loans out at 551.6B vs. 650B expected and 740B in Apr.
  • New Zealand May REINZ New Housing Price Index fell -1.8% MoM vs. +1.1% in Apr.
  • New Zealand May REINZ House Sales rose 10.8% YoY vs. -4.2% in Apr.
Upcoming Economic Calendar Highlights (all times GMT)
  • UK BoE’s Weale to Speak (!800)
  • US Fed’s Fisher to Speak (2300)
  • UK May RICS House Price Balance (2301)
  • Japan Q2 BSI Large All Industry/Manufacturing Survey (2350)
  • Australia May NAB Business Conditions/Confidence (0030/0130)
  • China May Producer Price Index (0200)
  • China May Consumer Price Index (0200)
  • China May Retail Sales (0200)
  • China May Industrial Production (0200)
  • New Zealand May Non-resident Bond Holdings (0300)

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