Financial Advisor

USD basking in risk aversion, while Aussie stumbles on RBA

The USD got more pronounced relief overnight on continued unwinding of the risk premium from the debt ceiling issue and failing risk appetite. Meanwhile, Aussie longs stumbled on a very dovish RBA statement.

RBA
The RBA left rates unchanged as expected and expressed more marked concern than previously about the state of the global economy. While concern was still expressed on the inflation front, there was a healthy dose of extra concern in the statement that was aimed at the domestic growth front as well, including the observation that credit growth is in decline and there is more “cautious behavior” on the part of households. The strong Aussie was also noted as having a “noticeable dampening effect.”

The market took this report as very dovish as the timing of the first projected RBA cut was shifted dramatically forward. September 2012 Australia STIR futures rallied a full 26 ticks, fully overwhelming the downside from the highQ2 inflation report from last week. AUDUSD swooned and is suddenly much  closer to the 1.0800/1.0775 zone of support than it was yesterday. The Aussie yield curve is now inverted again (as the 10-year yield fell below the overnight rate), a classic sign of an economy moving into – or already in – a recession. A nasty drop in building approvals in June did little to support the currency either, which was the weakest among the G-10 since the end of yesterday’s US session.

Chart: AUDUSD
AUDUSD saw a significant correction lower on the back of a dovish RBA. The direction in risk appetite is a headwind at the moment as well, though the pair still has the significant 1.0775/1.0800 area of support in place as well as the longer term trendline. Bears will note the recent inability of the pair to maintain new highs above 1.10. The lines in the sand are drawn and the maneuvering room rather constricted, so it appears the pair will commit one way or another soon.
US debt ceiling in rear-view mirror
While the US debt ceiling issue will now fast disappear in the rear view mirror for a while until US politicians attack the subject of the nation’s indebtedness in presenting their visions for the country’s future in next year’s presidential election, it is worth noting that Texas representative Ron Paul pointed out that a mere spending freeze would have accomplished more on the spending side than the bill that was passed. Extend and pretend, indeed.

Euro strains continue
European yields at the periphery (with the focus now on Spain and Italy and not the three little PIGs) continue to rush higher while bond yields at the core push lower. Italian 2-year yields reached a new high for the cycle close to 5.0% before pulling back a bit, and Spain’s Zapatero felt the situation in Spain is serious enough that he delayed his vacation plans. There is a growing fear that the lame-duck government will not be able to act with sufficient force to avert a new crisis as the election period lasts all the way until November. The Spanish-German 10-year yield spread reached 400 basis point before easing later in the day.

Low yields and the JPY
While bonds traded to new highs (pushing US 10-year benchmark yield all the way down to 2.68% in today’s trade, a steep 30 bp drop from last week and the lowest yield since the weeks ahead of and around the announcement of the Fed’s QE2 policy), USDJPY has failed to make further progress lower in correlation with yields as is its wont. The saber-rattling at the Japanese Ministry of Finance is becoming more urgent and traders are perhaps reluctant to dive in here and are perhaps hoping for an intervention spike to put on a position. Japan’s MOF’s Noda said that he was talking to the Bank of Japan and other countries on how to deal with the strong JPY.

US consumption
The US Personal Spending data for the month of June was the weakest since the fall of 2009 and all consumption related data out of the US has looked very weak of late – particularly the 0.1% annualized consumption growth for Q2. It will be interesting to see whether this trend is underlined by tomorrow’s July ISM non-manufacturing release.

Looking ahead
The US S&P500 – a generic world risk benchmark if there is one – closed right on the 200-day moving average yesterday after a brief foray below that level intraday. This same moving average was touched on numerous occasions, though never broken, back in June. Ahead of today’s US open, the action is taking the index below the average again, and also within a stone’s throw of the neckline a large head and shoulder formation. The USD is having a banner day at the same time on the reduction of the risk premium associated with the end of the immediate pressures on the debt ceiling issue and on the shakiness of risk appetite in general – largely in line with its previous behavior. As long as the US avoids a new blowup in sovereign debt concerns and as long as risk appetite remains off, the greenback stands a chance of further upside in the near term. That 200-day moving average in the S&P500 will serve as the trench across which the tug of war rope between the bulls and bears has been strung.

The data coming out of the US seems to be weakening so rapidly that the focus is likely to swivel back to the Fed and what it plans to do, if anything, to keep the US economy afloat.  On that note, tomorrow’s ISM non-manufacturing and Friday’s employment report are critical for further impressions of the weakness in “incoming data” and whether we await a new hint of the next round of QE at this year’s Jackson Hole conference later this month. Tune in on August 26th at 1400 GMT…

In Asia, look out for a further heavy load of Aussie data.

Stay careful out there

Economic Data Highlights
  • New Zealand Q2 Private wages Excluding Overtime rose +0.5% QoQ as expected and vs. +0.4% in Q1
  • Australia Q2 House Price Index fell -0.1% QoQ and -1.9% YoY vs. -1.0%/-3.0% expected, respectively and vs. 0.0% YoY in Q1
  • Japan Jun. Labor Cash Earnings fell -0.8% YoY vs. +0.5% expected and +1.0% in May
  • Australia Jun. Building Approvals fell -3.5% MoM and -15.5% YoY vs. +3.0%/-10.3% expected, respectively and vs. -13.3% YoY in May
  • Australia RBA Cash Target left unchanged at 4.75% as expected
  • Norway Jul. PMI out at 56.5 vs. 55.5 expected and 56.4 in Jun.
  • Switzerland Jun. Retail Sales out at +7.4% YoY vs. -3.9% in May
  • Switzerland Jul. PMI Manufacturing out at 53.5 vs. 52.5 expected and 53.6 in Jun.
  • UK Jul. PMI Construction out at 53.5 vs. 53.1 expected and 53.6 in Jun.
  • EuroZone Jun. PPI out at 0.0% MoM and +5.9% YoY vs. +0.1%/+5.9% expected, respectively and vs. +6.2% in May
  • US Jun. Personal Income out at +0.1% MoM vs. +0.2% expected and +0.2% in May
  • US Jun. Personal Spending out at -0.2% MoM vs. +0.1% expected and vs. +0.1% in May
  • US Jun. PCE Deflator out at +2.6% YoY as expected and vs. 2.6% in May
  • US Jun. PCE Core rose +0.1% MoM and +1.3% YoY vs. +0.2%/+1.4% expected, respectively and vs. +1.3% YoY in May

Upcoming Economic Calendar Highlights (all times GMT)
  • US Weekly API Crude Oil and Product Inventories (2030)
  • US Jul. Vehicle Sales (2100)
  • Australia Jul. AiG Performance of Service Index (2330)
  • China Jul. Non-manufacturing PMI (0100)
  • Australia Jun. Trade Balance (0130)
  • Australia Jun. Retail Sales (0130)
  • China Jul. HSBC Service PMI (0230)

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