Yesterday’s bounce was impressive, but there are too many unknowns and
pivotal questions circulating for any immediate clarity or direction.
Headline risk remains high.
SNB
The SNB announced further measures aimed at weakening the Swiss Franc, as EURCHF traded within a big figure of parity during the worst of the panic yesterday before the rally. It announced a further expansion of sight deposits to CHF 120 billion and also announced it would conduct swap transactions aimed at increasing franc liquidity. This managed to push EURCHF up about 100 pips, but the move was later retraced such that EURCHF was essentially trading unchanged from this morning’s levels. It’s worthy noting that the franc’s sell-off from its peak yesterday has been far less exuberant than the rally in equity markets, for example. Some of the blame for that can be placed on fixed income, as yields falling further in the US (to a new record sub-20 bps for the 2-year note, owing to the Fed’s timeframe promise for easing) and remaining very low in Germany (consider the inverted yield curve of a 150 bps ECB target rate and 71 bps for the German 2-year yield!). It would seem EURCHF might have a chance of turning when the short end of the major yield curves stops falling or reverses.
JPY, too
The same goes for JPY crosses (pressure on JPY to strengthen as long as short end of the yield curve is falling). Just look at the chart below showing USDJPY vs. the US 2-yr. yield. At the same time, we can’t completely ignore the long end of the yield curve and what it might be saying about the two countries’ default risk. It is Interesting to note, for example, that the recent 40-year JGB auction saw very weak demand and yields at for that incredibly long bond remain stable relative to several months ago while 30-year yields in the US, for example, have fallen 60 or so bps. Of course, 40-year JGB’s have very little liquidity relative to US 30-years, but this might be considered a crack in the façade of Japan’s 200% of GDP sovereign debt load. 20-year JGB yields have reversed rather strongly off their recent lows as well, even before the large bounce induced yesterday by relief in risk appetite. Food for thought?
Chart: USDJPY vs. US 2-year yields
Can anyone spot the correlation? The US has 17 bps until the zero bound. After that, the comparison between Japan and the US may be the speed of the printing presses and the degree to which the long end of the yield curve suggests rising default risk.
SNB
The SNB announced further measures aimed at weakening the Swiss Franc, as EURCHF traded within a big figure of parity during the worst of the panic yesterday before the rally. It announced a further expansion of sight deposits to CHF 120 billion and also announced it would conduct swap transactions aimed at increasing franc liquidity. This managed to push EURCHF up about 100 pips, but the move was later retraced such that EURCHF was essentially trading unchanged from this morning’s levels. It’s worthy noting that the franc’s sell-off from its peak yesterday has been far less exuberant than the rally in equity markets, for example. Some of the blame for that can be placed on fixed income, as yields falling further in the US (to a new record sub-20 bps for the 2-year note, owing to the Fed’s timeframe promise for easing) and remaining very low in Germany (consider the inverted yield curve of a 150 bps ECB target rate and 71 bps for the German 2-year yield!). It would seem EURCHF might have a chance of turning when the short end of the major yield curves stops falling or reverses.
JPY, too
The same goes for JPY crosses (pressure on JPY to strengthen as long as short end of the yield curve is falling). Just look at the chart below showing USDJPY vs. the US 2-yr. yield. At the same time, we can’t completely ignore the long end of the yield curve and what it might be saying about the two countries’ default risk. It is Interesting to note, for example, that the recent 40-year JGB auction saw very weak demand and yields at for that incredibly long bond remain stable relative to several months ago while 30-year yields in the US, for example, have fallen 60 or so bps. Of course, 40-year JGB’s have very little liquidity relative to US 30-years, but this might be considered a crack in the façade of Japan’s 200% of GDP sovereign debt load. 20-year JGB yields have reversed rather strongly off their recent lows as well, even before the large bounce induced yesterday by relief in risk appetite. Food for thought?
Chart: USDJPY vs. US 2-year yields
Can anyone spot the correlation? The US has 17 bps until the zero bound. After that, the comparison between Japan and the US may be the speed of the printing presses and the degree to which the long end of the yield curve suggests rising default risk.
BoE Inflation Report
The Bank of England’s quarterly inflation report was released today and featured a rather downbeat Mervyn King, as discussed by our Nick Beecroft in his assessment of the report from earlier today. Inflation was deemed likely to come in below target in the medium term, though with upside risks, and growth projections were revised downward. International and domestic “headwinds are growing stronger by the day.” King seemed to rule out the need for any stimulus at the present time, but expected economic weakness to persist. A general comment that was thrown in was that there are limits to what monetary policy can achieve and that interest rates would eventually have to rise. He saw no reason for committing on the interest rate outlook. In general, his stance seems far more pragmatic than Bernanke’s academic-driven beliefs in the power of monetary policy. September 2012 short sterling STIRs were five ticks higher as we are five ticks higher than yesterday’s close as we are writing this. In the major GBP crosses, GBPUSD is still fighting for life above the critical 1.6200 area. A failure there could open up for a 1.60 test. In EURGBP, it appears 0.8880 is shaping up as the tactical resistance of interest.
Norges Bank
Not a huge surprise considering market circumstances that Norges Bank decided to emphatically pass on tinkering with interest rates here, even as expectations had built up previous to the last couple of weeks of market action that the bank was ready to tighten again. Still, while yields at the front end of the curve dropped several bps, the bank’s comments on the domestic economy were generally positive and further reference was made to the strength in the domestic housing market, likely the source of most of the rate hike impetus. The bank said there are domestic signs of the need for further rate rises, even as inflation in general was described as low and there is plenty of worry on the international front. AUDNOK shorts are likely look for a place to reload…
Looking ahead
A shock sell-off followed by a shockingly steep bounce. What is next? When the bounce is over, there is likely to be at least one significant throwback sell-off, as there generally are for psychological reasons (new shorts coming in, but also a general de-risking at better prices for those who failed to unload risk on the initial plunge). But how much room for weakness is there beyond recent lows?
Besides that, the focus for the near term will be on the ECB and EU actions as it continues to grapple with the sovereign debt crisis and the need for a larger bailout framework. The German CDS prices have been galloping higher of late while for the US, they are flat since the debt ceiling deal was struck.
As for the “incoming information” that the Fed needs to trigger QE3, the next data points are tomorrow’s weekly jobless claims and trade balance numbers, followed by Friday’s more important Retail Sales and Michigan Confidence survey data.
AUD traders, beware the employment data out tonight. Aussie could get twitchy again if we get an ugly data point in the midst of a throwback sell-off in risk. RBA year forward expectations are a stunning -130bps for the coming 12 months, compared to -15 bps on the first of this month. The latest Westpac consumer confidence survey in July showed confidence dropping to levels from more than two years ago, when we were just crawling out of the crisis.
Finally, we have USDJPY pushing at that 76 level, close to which the first round of intervention began. There is also the general risk of coordinated action as outlined yesterday by our Chief Economist, Steen Jakobsen. The market is likely to continue to exhibit wide swings for some time.
Economic Data Highlights
The Bank of England’s quarterly inflation report was released today and featured a rather downbeat Mervyn King, as discussed by our Nick Beecroft in his assessment of the report from earlier today. Inflation was deemed likely to come in below target in the medium term, though with upside risks, and growth projections were revised downward. International and domestic “headwinds are growing stronger by the day.” King seemed to rule out the need for any stimulus at the present time, but expected economic weakness to persist. A general comment that was thrown in was that there are limits to what monetary policy can achieve and that interest rates would eventually have to rise. He saw no reason for committing on the interest rate outlook. In general, his stance seems far more pragmatic than Bernanke’s academic-driven beliefs in the power of monetary policy. September 2012 short sterling STIRs were five ticks higher as we are five ticks higher than yesterday’s close as we are writing this. In the major GBP crosses, GBPUSD is still fighting for life above the critical 1.6200 area. A failure there could open up for a 1.60 test. In EURGBP, it appears 0.8880 is shaping up as the tactical resistance of interest.
Norges Bank
Not a huge surprise considering market circumstances that Norges Bank decided to emphatically pass on tinkering with interest rates here, even as expectations had built up previous to the last couple of weeks of market action that the bank was ready to tighten again. Still, while yields at the front end of the curve dropped several bps, the bank’s comments on the domestic economy were generally positive and further reference was made to the strength in the domestic housing market, likely the source of most of the rate hike impetus. The bank said there are domestic signs of the need for further rate rises, even as inflation in general was described as low and there is plenty of worry on the international front. AUDNOK shorts are likely look for a place to reload…
Looking ahead
A shock sell-off followed by a shockingly steep bounce. What is next? When the bounce is over, there is likely to be at least one significant throwback sell-off, as there generally are for psychological reasons (new shorts coming in, but also a general de-risking at better prices for those who failed to unload risk on the initial plunge). But how much room for weakness is there beyond recent lows?
Besides that, the focus for the near term will be on the ECB and EU actions as it continues to grapple with the sovereign debt crisis and the need for a larger bailout framework. The German CDS prices have been galloping higher of late while for the US, they are flat since the debt ceiling deal was struck.
As for the “incoming information” that the Fed needs to trigger QE3, the next data points are tomorrow’s weekly jobless claims and trade balance numbers, followed by Friday’s more important Retail Sales and Michigan Confidence survey data.
AUD traders, beware the employment data out tonight. Aussie could get twitchy again if we get an ugly data point in the midst of a throwback sell-off in risk. RBA year forward expectations are a stunning -130bps for the coming 12 months, compared to -15 bps on the first of this month. The latest Westpac consumer confidence survey in July showed confidence dropping to levels from more than two years ago, when we were just crawling out of the crisis.
Finally, we have USDJPY pushing at that 76 level, close to which the first round of intervention began. There is also the general risk of coordinated action as outlined yesterday by our Chief Economist, Steen Jakobsen. The market is likely to continue to exhibit wide swings for some time.
Economic Data Highlights
- Japan Jul. Domestic CGPI out at +0.2% MoM and +2.9% vs. 0.0%/+2.6% expected, respectively and vs. +2.6% YoY in Jun.
- Australia Aug. Westpac Consumer Confidence out at 89.6 vs. 92.8 in Jul.
- China Jul. Trade Balance out at +$31.5B vs. +$27.4B expected and +$22.3B in Jun.
- Norway Jul. CPI out at -0.2% MoM vs. -0.4% expected and -0.4% in Jun.
- Norway Jul. Underlying CPI out at -0.1% MoM and +1.2% YoY vs. -0.3%/+1.0% expected, respectively and vs. +0.7% YoY in Jun.
- Norway Jul. Producer Price including oil out at +1.6% MoM and 16.1% YoY vs. +14.9% YoY expected and +14.4% YoY in Jun.
- Norway Norges Bank left rates unchanged at 2.25% vs. 2.50% previously expected
- US DoE Weekly Crude Oil and Product Inventories (1430)
- New Zealand Jul. Business NZ PMI (2230)
- Japan Jun. Machine Orders (2350)
- New Zealand Aug. ANZ Consumer Confidence (0100)
- Australia Jul. Employment Change and Unemployment Rate (0130)
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