FX Update: Greenback stands tall. All else to fall?
Action overnight was largely a continuation of yesterday's, with the USD grinding out new solid gains almost across the board as EuroZone sovereign spreads on the PIGS widened further. Solid data out of Australia interestingly failed to boost the Aussie. Chinese equities had a very strong rally off new lows, but the rest of the world largely failed to respond and ahead of the US open, the US equity futures were close to their lows from yesterday.
This week has seen the largest gain in the dollar index since the mayhem of fall 2008 to spring 2009. This is no dramatic surprise since the weak Euro makes up a dominant portion of the dollar index basket. More interestingly, our USD vs. rest of G-10 basket has reached a new high here since August of last year, a testament to the greenback's broader strength vs. the market.
Latest on Euro meltdown
Today saw further widening in the PIGS debt spreads, though they are still a bit tighter than at their extremes a week ago. Moody's was out saying that its AA2 ratings for Portuguese sovereign debt were on review for a possible downgrade. This news item saw EURUSD pushing to fresh lows close to 1.2900. As well, a Market News International says an ECB source indicated that the ECB is unlikely to "embark on such a radical departure from its current policy in the near future" (buying government bonds), though the source "did not shut the door entirely on the idea". The question of course, is whether the ECB is forced down the path whether it wants to or not. There is little to suggest that the situation in Europe is improving, and this could result in a continued freefall in the EUR today if no dramatic developments are forthcoming. We have to imagine that a strong response from the ECB has to be forthcoming ahead of the weekend to stop some of the bleeding. Until then, 1.2500 isn't out of the question at the rate things are going at the moment - after all, we've dropped over 500 pips from the highs on Monday in EURUSD already.
What's up with the Yen?
It's very tough to draw a bead on the Japanese Yen at the moment. All of the current drama is unfolding while Japan is on vacation, making it tough to gauge whether the odd divergences we are seeing (most notably, the USDJPY at the top of the recent range despite strong bond rally in the US, but also less downside in all JPY crosses than one would have expected considering strong bonds and weak stocks) is due to thin liquidity and sharks gunning for 95.00 barriers or whether something else is brewing. We will assume that the old correlations will assert themselves again, but the JPY crosses bear watching as Japan returns to work tomorrow. As if the market is sensing that we are writing these words, US treasuries notched several more points of gains suddenly while USDJPY hardly moved by a pip. Hmm....
Chart: USDSEK
Euro is a basket case, but look at USDSEK - as SEK is a currency leveraged to Europe via its export-dependent economy, so EURSEK is actually sharply higher on the day.
Norges Bank
Norges Bank went ahead and hiked rates 25 bps to 2.00%. A majority of analysts were expecting this move, but the recent turmoil had many, including us, wondering whether the odds were leaning more towards a pass. In the bank's statement, it said it considered leaving the rate unchanged. It's comments dwelled on the European situation and said that increases the uncertainty for the Norwegian economy. In addition, it noted that the krone is stronger than it projected, but that rates should be brought to a "more normal level". This is a bit more hawkish and shows a bit less concern about the strength of the krone.
There are two angles on the NOK here: on the one hand it is a small country with very little liquidity in its currency and is traditionally heavily correlated with oil prices, so one would think that any sell-0ff in risk would be negative for the NOK. On the other hand, vis-à-vis the specific problems in the EuroZone with its sovereign debt challenges, Norway stands tall with its world-beating balance sheet and rock solid finances. Our suspicion is still that an interest rate angle is not terribly interesting and that NOK will not outperform here as long as risk is going down in flames. The 6.10 resistance looks very interesting in USDNOK.
Looking ahead
The US ADP employment change was a non-event as it came in-line with expectations and reminds us that the US job market appears is stagnant rather than recovering at the moment. Watch the employment sub-index on the ISM non-manufacturing number late for further indication of the strength of the US job market. That sub-index just missed reaching above 50 for the first time since December of 2007. It's hard to get too excited about the employment picture in the US until the weekly initial jobless claims start to roll in well under 400k per week.
Watch out for important data points in Asia for Australia (Mar. Retail Sales and Trade Balance) and New Zealand (Q1 Employment Report). The main even tomorrow is, of course, the UK election. If we look at the EURGBP cross, we can say that the market is optimistic on the UK, considering the strong break of the 0.8600 level. But most of that is on Euro weakness. Looking elsewhere, the pound is by no means leading the pack at the moment and we have a classic sell-the-rumor, buy-the-fact setup here ahead of the election considering the market's still sizable short GBP position. (Though we are a bit uncomfortable to read that so many others expect a GBP rally after the election as we always prefer the contrarian side). Still, the side of least resistance seems to be to the upside for the pound. An interesting way to trade this view as long as markets are mired in this bout of risk aversion, is with a long GBPAUD position.
As we go to press, the US S&P500 futures are toying with the 55-day moving average around 1161 - this has been a key level in the past. If risk fails to make a stand around this level, the action could get even uglier. CAD and NOK traders: note that oil is over seven dollars off its recent high.
In the meantime, stay very careful out there as always.
Economic Data Highlights
- US Weekly ABC Consumer Confidence rose to -47 vs. -49 last week
- Australia Apr. AiG Performance of Service Index rose to 52.3 vs. 48.9 in Mar.
- Australia Mar. Building Approvals rose 15.3% YoY and 51.6% YoY vs. +0.8/25.6% expected, respectively
- UK Apr. Construction PMI out at 58.2 vs. 53.2 expected and 53.1 in Mar.
- EuroZone Mar. Retail Sales out at 0.0% MoM and -0.1% YoY vs. +0.1/-0.5% expected, respectively
- US Apr. Challenger Job Cuts fell -71.1% YoY vs. -55.0% in Mar.
- Norway Norges Bank raised Deposit Rate 25 bps to 2.00% as expected
- US Apr. ADP Employment Change out at +32k vs. +30k expected and 19k in Mar. (revised up from -23k)
Upcoming Economic Calendar Highlights
- US Apr. ISM Non-manufacturing (1400)
- US Weekly Crude Oil and Product Inventories (1430)
- US Treasury's Krueger to Testify (1700)
- New Zealand Q1 Unemployment Rate/Change (2245)
- US Fed's Rosengren to Speak (2300)
- Australia Mar. Trade Balance (0130)
- Australia Mar. Retail Sales (0130)