14 September 2010 at 21:01 GMT
The USD struggled lower still after Goldman report on more QE from the Fed and still robust risk appetite. The range is still intact in equity markets, but AUDUSD has broken to a new post-crisis high. Will the USD continue to suffer?
Some of the credit for today's blowout move in the USD was given to a Goldman report issued by Goldman's chief economist Jan Hatzius indicating the belief that the Fed would launch a renewed trillion dollar round of treasury buying, a kind of QE2 without the "non-traditional" elements that had been discussed previously. In any case, the move was helped out by a fall of the key resistance area in EURUSD in the 1.2920 area. AUD was also a heavy beneficiary of the USD selling and even the GBPUSD rocketed to life. Interestingly, the USDJPY move eased off a bit after the histrionics in the Asian session despite the big move in treasury yields lower through much of the US trading session.
Feeding some of the desperation may be the apparent Chinese desire to reduce exposure to the US and the "large" move in the USDCNY (looks impressive, though the entire cycle of strength since China announced the move on the yuan has only been a bit more than a percent) rate ahead of tomorrow's US House Ways and Means committee meeting on currency issues. Also driving the USD lower is the backdrop of the steep risk rally of late as the greenback maintains its almost perfect negative correlation with risk.
Chart: EURJPY
EURJPY traded through the 21-day moving average (the blue line), which has been an interesting one over the last couple of months, as the Euro was generally stronger across the board today. Could this set up a test of the next 109.60 area resistance and then the daily Ichimoku cloud area, or will bund yields plummet again and keep the pair mired in the range?
AUDUSD to a new high
AUDUSD has broken to a new post financial crisis high today, topping the previous 0.9420 market in today's trade on a combination of still robust risk appetite, gold prices rushing to a record high, and a broadly weak greenback. By no coincidence, the 2-year rate spread has ballooned back out to aboe 4.35%, the widest since before the financial crisis hit as well. The last time spreads were at these levels was back in July of 2008 when AUDUSD was trading at around 0.9500-0.9600. It's amazing how that kind of valuation metric remains steady even if it shouldn’t have for simple relative interest rate reasons. So to drive the AUDUSD higher from here, we would have to assume that Fed expectations at the short end of the curve remain relatively low (not a huge stretch of the imagination required there) while RBA rate expectations stretch higher from here (that's the bigger question). China's move on the yuan is adding a bit of extra oomph to the already very enthusiastic AUD rally.
Canada's Carney protests CAD strength
CAD got a boost from the recent BoC meeting in which the bank hiked and seemed to leave the door open to further hikes, and the rally in risk appetite and oil back well above 75 dollars/barrel haven't exactly hurt the currency. But the deteriorating trade fundamentals and signs of gathering softness (now there's phrase) make us skeptical on the potential for BoC to ratchet much higher on rates, if any higher at all. As for the recent CAD strength vs. the flailing greenback, which hurts CAD a bit more than most due to its overwhelming exposure to its neighbor to the south, this has quickly brought signs of concern from BoC governor Carney, who was out again today with a relatively dovish performance. He indicated that the BoC though the recovery would be slightly more gradual than they thought earlier this year and that recent CAD strength offers "challenges to the external sector". He also said that the BoC would "watch closely development in the foreign-exchange markets" as it relates to the bank's inflation target. So while USDCAD closed lower on the day, there is clear resistance from the bank to any further strength and it is also clear that the macroeconomic adjustment will continue as long as CAD stays anywhere close to these levels or higher.
SNB to Hike...??
Bizarre story of the day is that USB expects the SNB to hike rates 25 bps...this is an odd one considering the recent dip below 1.300 in EURCHF for the first time ever and no signs of inflation. Though the argument, as this article in ftalphaville discusses (), the reasoning behind such a move would come due to a closing output gap and problems with aggravated price rises in the real estate sector. The report may have contributed to some early CHF strength and USDCHF trading below parity for the first time since November of last year and posting its lowest levels since March of 2008. CHF crosses have been very wobbly of late already and this could mean plenty more volatility on Thursday when the SNB announces its rate decision. SNB rate expectations have risen almost 20 bps before today over the last couple of weeks of risk rallying, but today's story only moved the expectations about one bp. Pretending that the rest of the world or foreign curencies didn't exist, we might agree with USB, but here we find ourselves in a world of many countries and many currencies that have devalued sharply vs. the franc...but hats off if they are right on this one...
Looking ahead
Today's action is a dramatic statement on USD weakness by the market, even as critical equity resistance remains in place in equity land. If something doesn't change fast on the risk side of the equation, the trend could continue to deepen. The next big test of the USD is perhaps the 200-day moving average in EURUSD, which was last crossed in mid January when it was up close to 1.43. Support is now the 1.2920 area.
Next up on the economic calendar we have consumer confidence and Q2 dwelling starts data out of Australia tonight. Tomorrow we have the BoE's King speaking, Canada Jul. Manufacturing Sales and the US Empire survey and Industrial Production numbers.
Stay careful out there.