Commodity and EU-induced nerves push AUDUSD below parity

Gold rushed to new recent lows and close to strategic support while commodities elsewhere and risk appetite were also weak on the day, pushing AUDUSD to just below the parity level in today's trade. 

Euro nerves and what appears to be across the board macro deleveraging (unwinding the “punish the money printers, reward the hard assets” trade) pushed the Euro to new lows since January and pushed AUDUSD through parity for the first time since December 28th (please see my note on AUD and CAD positioning from this morning if you missed it:  )
It’s rather interesting that the market barely even registered the Chinese RRR move over the weekend as the focus on EU risks (Greece coffers running on empty and still no government has formed, meaning likely wait until new elections in June) and the discomfort from the JP Morgan loss revelation are keeping the uncertainty trade on the front burner. And uncertainty means deleveraging, plain and simple. The Spain to Germany 10-year spread yawned as much as 40 bps wider on the day as Spain’s yield vaulted above the symbolic 6.00% resistance level. The high last November for that benchmark was just under 6.75%. This was despite Spanish and Italian debt auctions went reasonably well, particularly the Italian one, which included an auction for maturities beyond 10 years.

Meanwhile, the desperate safety-seeking continues, as German bunds notched yet another record low in yield well below 1.50% and US 10-year notes are close to following suit within a stone’s throw of 1.75% (there were only four days in which the benchmark traded at lower yields in September and October of last year).

Milestones and spookiness
A couple of very interesting milestones that have been reached today include AUDUSD dropping below parity (almost a six-month low) and EURGBP slipping below the 0.8000 mark for the first time since late 2008. EURUSD is still a couple of figures above its significant 21-month low at 1.2620. The sell-off in EURUSD has been a bit eerie of late – quite persistent but of low volatility, as my ATR indicator shows that the recent break below 1.30 and the whirlwind of bad news is failing to generate much volatility. The latter, however, is day-to-day, and the options market is beginning to pick up, with 3-month EURUSD vol moving above 11% today. I would expect volatility to pick up further from here. There are a few possible explanations for the fairly civilized (so far) behaviour in the Euro. First, the currency is already relatively unpopular, so much of the speculative market is likely already rather short. Second, many out there may be anticipating a new round of intervention since intervention always seems to be the inevitable response - or some may be awaiting more decisive news before trading.

Looking ahead
The only thing that might restore sentiment in Europe in the short term is a Greek coalition forming (hopes appear dim) or perhaps an emergency Troika decision to extend funding until Greece can figure out its leadership situation, perhaps after June election (nothing to suggest this now, but nothing like an impending deadline or desperation to provoke action…).

Markets are going to remain nervous for some time with the ad hoc situation in Greece on top of the opaque unknown of JPMorgan’s ongoing struggles to unwind the doomed portion of its derivative portfolio and whether other skeletons lurk there.

On the economic calendar front, we’ve got the German ZEW survey as well as the US CPI, Empire Manufacturing and Advance Retail Sales numbers tomorrow. On Wednesday, GBP will be in the hot seat on the latest BoE quarterly inflation report and as the FOMC minutes are due later that day.

Stay safe out there.

Economic Data Highlights

• New Zealand Apr. Performance of Services Index out at 56.7 vs. 54.2 in Mar.
• New Zealand Q1 Retail Sales out at -1.5% QoQ vs. -0.5% expected
• Japan Apr. Domestic CGPI out at +0.3% MoM and -0.2% YoY vs. +0.1%/-0.3% expected, respectively and vs. +0.5% YoY in Mar.
• Australia Mar. Home Loans out at +0.3% MoM vs. -2.0% expected
• Switzerland Apr. Producer and Import Prices fell -0.1% MoM and -2.3% YoY v. +0.2%/-2.1% expected, respectively and vs. -2.0% YoY in Mar.
• Euro Zone Mar. Industrial Production out at -0.3% MoM and -2.2% YoY vs. +0.4%/-1.4% expected, respectively and vs. -1.8% YoY in Feb.

Upcoming Economic Calendar Highlights (all times GMT)

• Australia RBA Meeting Minutes (0130)
• New Zealand Apr. Non-resident Bond Holdings (0300)
• Japan Apr. Consumer Confidence (0500)