07 September 2010 at 14:13 GMT
A bit of nostalgia on the PIGS sovereign debt issue as Portuguese debt spreads vs. Germany widen to a new record. Has the market dropped the ball on this issue? Also, USDJPY trading at new 15-year low as summer is officially over.
Swedish government to buy EURSEK
During the crisis days of early 2009 and through the end of that year, the Swedish government issued significant debt in foreign currency and bought EURSEK simultaneously in an effort to satisfy funding needs. The bet paid off, as the Swedish National Debt Office has announced that the unrealized gains on the currency trades is some SEK 6 billion. Now, the SNDO has announced that it will unwind its position over the "nearby future" as it feels that current EURSEK levels are normal. The position amounts to some SEK 50 billion. This is a significant position to unwind, though the SNDO will try to do it as quietly as possible. As for its effects on EURSEK, it will probably be felt in fits and starts. As long as the market mood remains optimistic and the market continues to price in a couple more rate hikes or more over the coming year, EURSEK could yet continue to appreciate slowly, while bouts of risk aversion could see sharp back-up rallies in EURSEK due to the SEK's normal correlation with risk and the knowledge that the government is unwinding its position.
Euro weaker on stress test criticism
A bit surprising to see the market reacting so strongly to something that one would have thought was common knowledge, but the Euro was apparently weaker today on a WSJ article claiming that the stress tests on European banks underestimated the exposure to sovereign debt. This saw sovereign spreads a bit wider again with the expected effect on Euro crosses. The action also reminded us that this issue can affect overall risk appetite, which ended on a high on Friday at the tail end of a remarkable three-day squeeze but is now under some pressure again ahead of the US open(though the technicians will argue that we are bouncing off key resistance levels in the major US indices, like the 200-day moving average on the Dow and S&P500). Also getting some attention was an announcement from the Federal Association of German Banks that the new Basel III rules would require German banks to raise another EUR 105 billion in capital.
Chart: EURUSD vs. Italy/Spain sovereign debt spread
The chart below shows how the sovereign debt spreads have done little to justify the extent of the EURUSD rally, which saw other issues coming to the fore (especially the fear/expectation of a new quantitative easing initiative from the Fed due to deteriorating US) If the market decides to increase its focus on the Euro sovereign debt issue once again, then EUR has further adjusting to do to the downside. Also note that here we only included the larger "peripheral" spreads. Portuguese spreads, for example, are really blowing out again, with the 10-year spread to German bunds at over 350 bps now - about as bad as it ever was earlier this year.
JPY stronger again again
Fixed income was rebounding strongly on the EuroZone debt story, and with that as a backdrop, the do nothing attitude from the BoJ can only mean that the JPY is stronger again. Do-nothingism from the public sector in Japan also has helped the Japanese sovereign CDS prices back lower, further supporting the renewed sell-off in USDJPY and EURJPY in particular in today's session, as that pair is now looking like it wants to test its 9-year lows again. USDJPY, meanwhile, is touching a new 15-year low.
AUD
The AUD traded a shade weaker today on the consolidation in risk appetite and as the RBA failed to make any changes to its monetary policy statement as it passed on moving on rates as expected. Also somewhat bearish for AUD (though largely expected), the new minority government has been formed and has the independents siding with the Labour party, so there will be no end to the mining tax and the country still risks bad-for-business-and-investment moves on climate change policies. With AUDUSD trading back well above 0.9000 again, is anyone noticing that the Services and Construction surveys suggest these two areas of the economy are in recession?
Looking ahead
We suggested that last week's strong close into the finish may have been about the expectation of a strong move by the Obama administration sometime this week in a last ditch effort by the administration to shore up its chances at the November 2 election. The Labor Day speech by the president only showed the president asking for a $50 billion to repair roads and other infrastructure and is hardly a game changer for the markets. But the hope that something bigger may be coming this week is still out there. One suggestion is a payroll tax holiday. Let's see. If no stimulus gravy train arrives from the government very soon, the rally in risk may peter out quickly.
It is important to note on the risk appetite front that the S&P500 has failed to stay above 1100 on two separate occasions after that level was penetrated back in May. (We have also seen two false breaks of the 200-day moving average during that period) Now that we are officially back to business and out of the summer trading period, this line in the sand on risk will be an important once to watch. We also note with extreme interest the move in USDZAR, which does not jibe with the impression from risk markets elsewhere. After trading to a new multi-year low just below the key 7.20 area, the pair has backed up sharply higher. Is this indicative of EM nervousness or is it just because we have some news out that the South African central bank has upped its purchases of greenbacks to keep the ZAR from heading stronger?
Watch out CAD traders as tomorrow we get a the Canadian July building permit numbers, Aug. Ivey PMI and most importantly, the Bank of Canada rate decision, as the market is very split on whether the BoC moves to bring the rate to an even 1.00% It's tempting to think so, but the trajectory of the Canadian and US economies suggests little need to do so. The 1.0480 area looks important for USDCAD if it wants to dig itself out from the steep sell-off of late.
Economic Data Highlights
- Australia Aug. AiG Performance of Construction Index out at 43.2 v. 43.3 in Jul.
- Japan BoJ left rates unchanged at 0.10% as expected
- Australia RBA left rates unchanged at 4.50% as expected
- Norway Q3 Consumer Confidence out at 22.7 vs. 16.5 expected and 18.5 in Q2
- Switzerland Aug. Unemployment Rate out at 3.8% vs. 3.7% expected and 3.8% in Jul.
- Norway Jul. Industrial Product Manufacturing rose +0.1% vs. -0.8% expected
- Germany Jul. Factory Orders out at -2.2% MoM and +17.7% YoY vs. +0.5%/+24.7% expected, respectively
Upcoming Economic Calendar Highlights
- US Weekly ABC Consumer Confidence (2100)
- Japan Jul. Machine Orders (2350)
- Japan Jul. Current Account (2350)
- Australia Jul. Home Loans (0130)
- Japan BoJ September Report (0500)