20 January 2012 at 14:41 GMT
Will the 1.30 round level prove too much of a hurdle for this EURUSD squeeze or could next week's FOMC usher in a further consolidation to higher resistance? The next three days will be pivotal for the short term EURUSD outlook.
It’s more than tough to draw a theme from today’s market action. On the one hand we have German Bund yields and US bond yields surging higher on the day, suggesting some easing of the safe haven seeking of late (or was the resilience in bonds of late not a sign of safe haven seeking, but merely anticipation of QE3 and now we are seeing some consolidation in bond markets due to uncertainty of the likelihood the Fed will flag QE3 next week at Wednesday’s FOMC meeting as we have seen further relatively strong US data over the last couple of days? That explanation would make a bit more sense for the last few days when we saw strong equities and a weak USD with flat bonds, but today’s action is less consistent – if we are seeing the market shrinking from stronger QE views, wouldn’t this be more USD positive?
It’s a waste of time to tie ourselves in knots over one day’s crosscurrents, and clearly one of the drivers in recent days has been a squeeze on very popular Euro shorts. Let’s see where we are at the beginning of next week and then after the FOMC meeting. In any case (and apart from attempts to understand), the surge in bond yields has been sharp and noticeable and has clearly supported JPY crosses of late and seems to have helped punish the other low yielders and money printers like the USD, though not necessarily GBP. JPY crosses have consolidated a bit lower today in some cases today, despite bond yields pushing higher still, but they are well off recent lows as interest rate remain the key driver.
In Europe, peripheral sovereign debt, in contrast to German bond benchmarks, was relatively bid and yields dropped – perhaps most importantly for Italy, where the 10-year benchmark is now down close to 6.25% after having bottomed out at a yield of over 7% just a couple of weeks ago. This was after yesterday’s reasonably good bond auctions, which included besides the Spanish and French auctions we discussed, a successful auction of 10- and 50-year (SIC) bonds by Austria – so successful, in fact, that Austria today announced it would forego its February auction as it felt itself flush enough with funds for now. (See
our new schedule of upcoming EU bond auctions.)But EURUSD topped out ahead of 1.30 so far today, as the squeezers felt perhaps they had been bold enough for now, while those who had been squeezed out or were looking for re-entry and figured that levels just ahead of 1.30 were a good re-entry point.
Odds and ends
UK Retail Sales looked quite positive for the month of December, but we need to recall when looking at the year-on-year data that last December had catastrophically bad weather, and the strong month-on month data only came after an even worse dip in November. The UK economy remains very weak.
Canada’s CPI saw CAD continuing to retrace versus the broader market, though Canadian STIRs don’t suggest that the market is working up any anticipation of further rate easing anytime in the near future, quite the contrary, as December 2012 STIRs are off 10-12 bps this week. CAD therefore looks more and more mispriced versus the likes of NZD and CAD from an interest rate spread perspective.
Chart: GBPUSD
While the UK Retail Sales data was rather weak today, we appear primed for a rather strong weekly candlestick for GBPUSD if we close near current levels here above 1.55 (which is right at the 0.618 retracement of the last sell-off wave). A close up near here today would be a bullish weekly reversal that comes just after the pair tried to take out key support just below 1.5300 this week and could lead to a test of the big 1.5775 area if the USD is headed for an extension of its weakness. Next week’s US FOMC meeting will help us see whether we get confirmation of this technical development. A return back below 1.5300 is needed to get the bear back on track. Note that the BoE minutes are also on tap next Wednesday.
Looking ahead
So far today, the action suggest the market would like to go quietly into the weekend, but closing levels are actually important today if we have a look at a couple of weekly candlesticks charts like the GBPUSD example we look at above. EURUSD is in a similar boat and the argument for a consolidation to the 1.3150 to 1.3200 is relatively easy as long as we keep the view that this is merely a consolidation within the context of an on-going downtrend.
Tomorrow features the third primary in the US Republican primary season, this time in the state of South Carolina, which is a far different place from New Hampshire. With the field reduced to four, the question is whether Gingrich’s momentum builds enough tomorrow and in Florida (on the 31st) to allow him to threaten the front-runner Romney. The market affect as long as one of these two remains the front-runner is minimal to nil until later in the election season when the market begins to contemplate the differences the Republican and Democratic candidates would make post-election. The most interesting candidate (in terms of potential impact on world financial markets), Ron Paul, may see his Republican run end shortly after Florida, where his support among older Medicare-dependent voters is minimal according to polls. But then the fun might begin anew if he declares himself an independent candidate for the presidency.
Have a wonderful weekend and be careful out there.
Economic Data Highlights
- China Jan. HSBC Flash China Manufacturing PMI out at 48.8 vs. 48.7 in Dec.
- Germany Dec. Producer Prices fell -0.4% MoM and rose +4.0% YoY vs. +0.1%/+4.6% expected, respectively and vs. +5.2% YoY in Nov.
- UK Dec. Retail Sales ex Auto Fuel out at +0.6% MoM and +1.7% YoY vs. +0.7%/+1.7% expected, respectively and vs. 0.0% YoY in Nov.
- Canada Dec. Consumer Price Index out at -0.6% MoM and +2.3% YoY vs. -0.2%/+2.7% expected, respectively and vs. +2.9% YoY in Nov.
- Canada Dec. CPI Core out at -0.5% MoM and +1.9% YoY vs. -0.2%/+2.2% expected, respectively and vs. +2.1% YoY in Nov.
- Canada Nov. Wholesale Sales out at -0.4% MoM vs. +0.5% expected
Upcoming Economic Calendar Highlights (all times GMT)
- US Dec. Existing Home Sales (1500)
- Australia Q4 Producer Price Index (Mon 0030)