The Euro continues to struggle for support as Euro Zone sovereign debt
spreads for Italy and Spain continue to ratchet wider. Meanwhile,
headline risks looms in the background on the US debt ceiling.
Risk was off steeply late yesterday in the US session, helping to boost the USD in some of the crosses, though the generally pro-risk/commodity currencies have withstood the pressure fairly well in today’s trade, such that the USD is only appreciably higher against the mightily struggling Euro, where spreads continue to ratchet wider on the likes of Spanish and Italian debt.
Klaus Regling, the head of the EFSF bailout facility, said today that the EFSF won’t be employed unless the ECB and EU member states agree. This would mean a cumbersome process for damping the risks of debt spread contagion, one would think, and dims the prospect of the EFSF serving as a kind of “back door” to a tighter EU fiscal union. Again, the celebration of last week’s bailout was clearly premature.
Chart: EURUSD
EURUSD drooped to a key support area around 1.4270/80 (area slightly above there was quite important too, as the steep rising line of consolidation – shown in blue – was taken out above 1.4300, and we also had the 55-day moving average). 1.4270/80 is where we have the previous high and the 0.382 Fibo retracement levels. The pair needs to find support in this pivot zone it would seem, if it wants to keep the focus on the higher end of the range. If it fails to garner support, the 1.4100 area might be the next focus.
Risk was off steeply late yesterday in the US session, helping to boost the USD in some of the crosses, though the generally pro-risk/commodity currencies have withstood the pressure fairly well in today’s trade, such that the USD is only appreciably higher against the mightily struggling Euro, where spreads continue to ratchet wider on the likes of Spanish and Italian debt.
Klaus Regling, the head of the EFSF bailout facility, said today that the EFSF won’t be employed unless the ECB and EU member states agree. This would mean a cumbersome process for damping the risks of debt spread contagion, one would think, and dims the prospect of the EFSF serving as a kind of “back door” to a tighter EU fiscal union. Again, the celebration of last week’s bailout was clearly premature.
Chart: EURUSD
EURUSD drooped to a key support area around 1.4270/80 (area slightly above there was quite important too, as the steep rising line of consolidation – shown in blue – was taken out above 1.4300, and we also had the 55-day moving average). 1.4270/80 is where we have the previous high and the 0.382 Fibo retracement levels. The pair needs to find support in this pivot zone it would seem, if it wants to keep the focus on the higher end of the range. If it fails to garner support, the 1.4100 area might be the next focus.
Odds and ends
The RBNZ managed to tack on another few bps of policy tightening on top of already high expectations that the bank is gearing up to hike interest rates in the near future. Governor Bollard said that as long as “global financial risks recede” (a very important caveat – we’re seeing more waxing rather than waning globally, even if local conditions in NZ have been quite strong), he saw “little need for the March insurance cut to remain in place much longer.” While it’s undeniable that carry considerations have operated in favor of the kiwi on the back of this statement, it remains tough for us to see much additional upside for the currency broadly speaking if the mood surrounding risk appetite remains sour.
US weekly jobless claims finally notched a reading below 400k for the first time in months, though that reading will inevitably be adjusted higher - likely to above the 400k mark – next week. Still, the data point is encouraging for the view that the recent uptick in claims is fading again.
As the Euro struggles, crude oil prices have remained relatively stable and the NOK has as well, with EURNOK once again threatening the massive 7.70 area that has held it since time immemorial (only one three-week bout of activity below that level since 2003). Certainly from a sovereign stability angle, the NOK remains attractive – but that currency has tended to trade in positive correlation with economic growth in its more recent history. It’s a conundrum for EURNOK traders – which horse is NOK riding on, or is it trying to ride on both at the same time. The action for the last several months has been totally inconclusive.
Looking ahead
The market picture is rather confused, to say the least, as there is no real apparent safe haven in this market – a theme we have touched on a bit lately as have other commentators. Have a look over at FTAlphaville’s blog entry on Rochdale analyst Dick Bove’s assertion that the markets need a new safe haven – and can’t find one – a very interesting read and reflects the market’s dilemma here.
There are more maneuverings going on in Washington today, with the Senate and House each voting on their own versions of bills aimed at limiting debt and lifting the debt ceiling. Boehner’s version appears dead on arrival and would be vetoed by Obama anyway. And the Senate’s Reid’s bill may not pass muster if it is put up for a vote in the House. Are we going to have to test whether the US government can continue to function normally beyond the August 2 deadline? The uncertainty here is thick.
Perhaps the most remarkable aspect of the debt ceiling debate is that there has been no proposal forwarded by either party that takes an appreciable bite out of the size of the deficit. The yearly deficit shortfall is on the order of $1.5 trillion or more yearly, and the supposedly fiscally conservative Republicans want to cut less than a trillion over ten years, with most cuts coming from projections for better economic growth?
Watch out for the heavy load of Japanese data up in the Asian session tonight, though the market doesn’t generally react much to Japan’s economic numbers – it’s usually a yield focus for the JPY. On that front, yesterday’s 5-year went off relatively orderly, though foreign participation dropped (wonder why) and the market generally judged it poorer than hoped, sending yields briefly higher and the JPY lower for a time. But the bond market has recovered again into today and the JPY is stronger again, with EURJPY pressing down toward the key 110 area. Today we have a 7-year auction, with results (if all goes as normal) published around 1700 GMT.
Economic Data Highlights
The RBNZ managed to tack on another few bps of policy tightening on top of already high expectations that the bank is gearing up to hike interest rates in the near future. Governor Bollard said that as long as “global financial risks recede” (a very important caveat – we’re seeing more waxing rather than waning globally, even if local conditions in NZ have been quite strong), he saw “little need for the March insurance cut to remain in place much longer.” While it’s undeniable that carry considerations have operated in favor of the kiwi on the back of this statement, it remains tough for us to see much additional upside for the currency broadly speaking if the mood surrounding risk appetite remains sour.
US weekly jobless claims finally notched a reading below 400k for the first time in months, though that reading will inevitably be adjusted higher - likely to above the 400k mark – next week. Still, the data point is encouraging for the view that the recent uptick in claims is fading again.
As the Euro struggles, crude oil prices have remained relatively stable and the NOK has as well, with EURNOK once again threatening the massive 7.70 area that has held it since time immemorial (only one three-week bout of activity below that level since 2003). Certainly from a sovereign stability angle, the NOK remains attractive – but that currency has tended to trade in positive correlation with economic growth in its more recent history. It’s a conundrum for EURNOK traders – which horse is NOK riding on, or is it trying to ride on both at the same time. The action for the last several months has been totally inconclusive.
Looking ahead
The market picture is rather confused, to say the least, as there is no real apparent safe haven in this market – a theme we have touched on a bit lately as have other commentators. Have a look over at FTAlphaville’s blog entry on Rochdale analyst Dick Bove’s assertion that the markets need a new safe haven – and can’t find one – a very interesting read and reflects the market’s dilemma here.
There are more maneuverings going on in Washington today, with the Senate and House each voting on their own versions of bills aimed at limiting debt and lifting the debt ceiling. Boehner’s version appears dead on arrival and would be vetoed by Obama anyway. And the Senate’s Reid’s bill may not pass muster if it is put up for a vote in the House. Are we going to have to test whether the US government can continue to function normally beyond the August 2 deadline? The uncertainty here is thick.
Perhaps the most remarkable aspect of the debt ceiling debate is that there has been no proposal forwarded by either party that takes an appreciable bite out of the size of the deficit. The yearly deficit shortfall is on the order of $1.5 trillion or more yearly, and the supposedly fiscally conservative Republicans want to cut less than a trillion over ten years, with most cuts coming from projections for better economic growth?
Watch out for the heavy load of Japanese data up in the Asian session tonight, though the market doesn’t generally react much to Japan’s economic numbers – it’s usually a yield focus for the JPY. On that front, yesterday’s 5-year went off relatively orderly, though foreign participation dropped (wonder why) and the market generally judged it poorer than hoped, sending yields briefly higher and the JPY lower for a time. But the bond market has recovered again into today and the JPY is stronger again, with EURJPY pressing down toward the key 110 area. Today we have a 7-year auction, with results (if all goes as normal) published around 1700 GMT.
Economic Data Highlights
- New Zealand RBNZ left cash target unchanged at 2.50% as expected
- Japan Jun. Retail Trade rose +2.9% MoM and +1.1% YoY vs. +1.5%/-0.5% expected, respectively and -1.3% YoY in May
- Sweden Q2 Manufacturing Confidence out at 0 vs. 7 expected and 6 in Q1
- Sweden Jul. Consumer Confidence out at 12 vs. 15.5 expected and 16.7 in Jun.
- Sweden Jul. Economic Tendency Survey out at 104.4 vs. 109.2 expected and 109.9 in Jun.
- Sweden Jun. Retail Sales rose +3.1% MoM and +3.4% YoY vs. +0.7%/+0.9% expected, respectively and vs. -0.9% YoY in May
- Sweden Jun. Unemployment Rate out at 8.8% vs. 8.6% expected and 7.9% in May
- Germany Jul. Unemployment Change fell -11k vs.-15k expected and -8k in Jun.
- Germany Jul. Unemployment Rate out at 7.0% as expected
- EuroZone Business Climate Indicator out at 0.45 vs. 0.83 expected and 0.95 in Jun.
- EuroZone Jul. Economic Confidence out at 103.2 vs. 104 expected and 105.4 in Jun.
- EuroZone Jul. Industrial Confidence out at 1.1 vs. 1.6 expected and 3.5 in Jun.
- EuroZone Jul. Services Confidence out at 7.9 vs. 9.2 expected and 10.1 in Jun.
- UK Jul. CBI Reported Sales out at -5 vs. +2 expected and -2 in Jun.
- US Weekly Initial Jobless Claims out at 398k vs. 415k expected and 422k last week
- US Weekly Continuing Claims out at 3703k vs. 3700k expected and 3720k last week
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US Jun. Pending Home Sales (1400)
- US Fed’s Lacker to Speak (1645)
- US Fed’s Williams to Speak (1830)
- New Zealand Jun. Building Permits (2245)
- UK Jul. GfK Consumer Confidence Survey (2301)
- Japan Jul. Markit/JMMA Manufacturing PMI (2315)
- Japan Jun. Overall Household Spending (2330)
- Japan Jun. Jobless Rate (2330)
- Japan Jun. National CPI (2330)
- Japan Jun. Industrial Production (2350)
- Australia Jun. RPData-Riskmark House Price Index (0030)
- China Jul. MNI Business Condition Survey (0135)
- Japan Jun. Construction Orders and Housing Starts (0500)
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