FX Closing Note: JPY makes waves as USD move stagnates
USD looking more "unchy" than punchy
Outside of USDJPY pair, the USD showed little desire to follow through stronger today as equities at first sold off before ticking up into the day's close. Still, an outright reversal was averted intraday in EURUSD, for example, as that pair managed to hold below the 1.4725 tactical resistance ahead of the weekend. We're still in mind-numbing correlation with risk appetite, though some of the USD hesitance in moving stronger today may have had to do with the massive strength in JPY and unwinding of USDJPY longs as 90.00 gave way - it is the predominantly traded JPY pair, after all.
Japanese yen cuts a path through the market...
JPY crosses were the big focus today as yesterday's USDJPY rally was a dastardly headfake ahead of today's massive JPY buying spree on strength in fixed income markets and intermittent risk aversion. Again, we wonder if this Yen move is going to climax around the end of the month as it is the end of the first half of the financial year in Japan. As well, to see if this strong JPY move can keep up a head of steam, we focus on the major support in the US 10-year benchmark at 3.25%. A fall through there could add up to a test through 131.00 in EURJPY to take an example. More exotic crosses like SEKJPY and NZDJPY could offer more octane to the downside in this scenario
G20 - New World Order - not quite...
The G20 summit produced a bit more than expected, though not as much as one Reuters trumpeted, claiming that a New world economic order is taking shape. That latter headline relates to the proclamations that the G20 is to become the premier global forum for discussing economic issues as the G8's relevance is clearly fading. Key nations also apparently agreed to crack down on compensation inside banks, with Mr. Brown leading announcements that measures will be stricter than what the market is expecting. This came after speculation that the UK and France were too much at odds to come to agreement. Bank reserve rules are also in the pipeline, with no specifics just yet. One of the more interesting developments outside of the economic policy discussions was the trio of Obama, Sarkozy, and Brown sending Iran a strong warning about its nuclear "deception" after intelligence recently uncovered the extent of secret Iranian nuclear facilities, the existence of which hadn't been relayed to international inspectors. Geopolitics used to matter and could again rather soon. The Iran issue is not sufficiently on the market's radar screen.
Great Expectations vs. Reality Bites
An interesting post over at the cynical "bear-blog" zerohedge.com notes the record gap in leading vs. coincident indicators, suggesting that expectations vs. reality are seeing the largest gap in the history of this measurement and that we could be in for a correction. Though if we look at the previous examples, the differential soared in 2004, and risk appetite nonetheless kept up a head of steam for years before making an adjustment lower. We have pointed out the amazing differences in expectations vs. current conditions in the German IFO and we break apart the two components of the US Conference Board Consumer Confidence Index in today's chart as well, to show the amazing level of divergence here as well. The second chart show how closely the present situation tracks the unemployment situation. So people's feelings about the present situation is as bad as it was even in the dark days of March, when the S&P500 was trading below 700. That shows how much the financial markets are about expectation than reality. Past patterns have proven that the market is right to predict that a recovery will happen even as the darkest days are upon us - will "this time" ever be different?
Technical Developments:
USD crosses: inconclusive - watching the 1.4600 area in EURUSD, 0.8610 in AUDUSD and 1.0975 in USDCAD for follow up moves in USD strength
JPY crosses: huge moves to the downside today. Encourages the idea of a new trend, with caveats as explained above.
GBP: this is looking desperate: the UK absolutely must come out with a very strong response to what is going with the pound next week with Brown headed home from Pittsburgh. It emerged in the news today that the BoE denied reports that it has summoned economists for "crisis talks" next week. Regardless of the reason for that meeting. The BoE and government can't simply shrug their shoulders with what is going on here. Some kind of climax resolution is likely - this kind of momentum can only be sustained for very short periods.
Looking ahead:
End of month is the next pivot for markets. Next week also is the big data week for the US, with the Unemployment report on Friday.