Market induces whiplash ahead of FOMC

Last night we get a risk appetite meltdown which suddenly yields to today’s melt-up in just about everything versus the Euro and the USD as negative PMI and IFO surveys weigh on the single currencies.

Yesterday saw a very ugly close in the US equity session that seemed to set up a USD recovery nearly across the board outside of perhaps USDCAD after the more hawkish than expected BoC rhetoric. Suddenly today, however, outside of a weak Euro, the USD is suddenly green in the face again, though we won’t know where we stand until the market votes on its confidence on the currency and - on risk appetite more broadly – in the wake of tonight’s FOMC meeting.

AUD mini-reversal of fortune.
AUDUSD closed in particularly ugly fashion yesterday, but arose from the ashes of that sell-off on the strength of the CPI data and a marginally stronger – if still slightly recessionary – flash manufacturing HSBC PMI reading out of China. With today’s improvement in risk sentiment and the horrible data out of Europe, it looks like the market is playing this as a green light to pile back into EURAUD shorts after the pair reached the midpoint of a consolidation triangle after the sharp move up from 1.2300.

Chart: EURAUD
The combination of terrible economic data out of Europe and the more supportive data out of Asia has the market putting back on the EURAUD short – but the old down trend has been thoroughly neutralized by the epic 1200+ pip rally off the August lows – meaning that it will take a lot for anything to look loike more than a consolidation from here - though there is certainly a lot of chart to play with, as even a 0.382 Fibo consolidation of the entire move would still mean another 150 pips or more of downside from here. I suspect the downside will find little further progress if the market’s mood “re-sours” after tonight’s FOMC meeting.

The European data
The European flash PMI’s today were downright awful, with Germany registering a miserable 45.7 vs. 48.0 and 47.4 in September and the European wide flash manufacturing PMI coming in at a 45.3, the lowest yet for the cycle. This was the lowest since mid-2009 and suggests that the picture may be getting even worse rather than stabilizing. Likewise, the German IFO survey was out at 100.0, a new low for the cycle and the worst since early 2010.

Chart: EURGBP
EURGBP turned tail today after recently managing to take out the 0.8100 resistance area and even the 200-day moving average slightly higher. Today’s action – if it holds into the close – suggests that the bears will have the upper hand as long as the 200-day MA remains in place as resistance. EURUSD and EURGBP have been very closely correlated in recent months, however, so if EURUSD reverses, it will be interesting to see if GBP can outperform. Note that the UK saw ugly CBI survey data today and note also the implications for the failure of the upside down head and shoulders formation if EURGBP falls from here.

Looking ahead
It felt yesterday like “something snapped” in terms of market sentiment, but a move like today’s moves, which come ahead of a key risk event, are hardly a confidence booster for those looking for a further consolidation in risk. We won’t know if today’s melt-up in risk and melt down in the USD is merely a mind-bending run on nervous risk shorts or a real reversal until we see tonight’s reaction and perhaps another day of follow-through, but suffice it to say that this market is whippy and dangerous at the moment.

Certainly, if the USD manages to stay weak after the FOMC meeting and the EURUSD manages to pull back above 1.3000, we’ll have to count ourselves as thoroughly hoodwinked by the last couple of days of market action as this would be a weak sign for the USD and a possible key reversal day. Stay tuned.

As for the FOMC meeting itself, there will only be the monetary policy statement itself to go on, since there is no press conference scheduled for today. On that note, we can only try to read the tea leaves of the statement’s comments on the economy, with continued dissatisfaction with the economy being dovish (theoretically USD bearish) while any notable upgrade on the satisfaction with progress in the economy would be more hawkish. I harbor little in the way of expectations on that front, as the market is really an overall “con game” of sentiment.

Also heads up for the RBNZ out less than two hours after the release of the FOMC statement. NZDUSD has now spent all of October not making up its mind on what it wants to do. November will likely be a different story, one way or another.

Stay careful out there.

Economic Data Highlights

• Australia Q3 Consumer Prices out at +1.4% QoQ and +2.0% YoY vs. +1.0%/+1.6% expected, respectively and vs. +1.2% YoY in Q2
• Australia Q3 Trimmed Mean CPI out at +0.7% QoQ and +2.4% YoY vs. +0.6%/+2.2% expected, respectively and vs. +2.0% YoY in Q2
• China Oct. HSBC Flash Manufacturing PMI out at 49.1 vs. 47.9 in Sep.
• Sweden Oct. Consumer Confidence out at -2.9 vs. +1.7 expected and +2.0 in Sep.
• Sweden Oct. Manufacturing Confidence out at -16 vs. -12 expected and -11 in Sep.
• Germany Oct. preliminary Manufacturing PMI out at 45.7 vs. 48.0 expected and 47.4 in Sep.
• Germany Oct. preliminary Services PMI out at 49.3 vs. 50.0 expected and 49.7 in Sep.
• Euro Zone Oct. preliminary Manufacturing PMI out at 45.3 vs. 46.5 expected and 46.1 in Sep.
• Euro Zone Oct. preliminary Services PMI out at 46.2 vs. 46.4 expected and 46.1 in Sep.
• UK Oct. CBI Trends – Total Orders out at -23 vs. -6 expected and -8 in Sep.
• UK Oct. CBI Business Optimism out at -12 vs. -2 expected and -6 in Sep.
• Canada Sep. Teranet/National Bank Home Price Index fell -0.4% MoM and rose +3.6% YoY vs. +4.1% YoY in Aug.

Upcoming Economic Calendar Highlights (all times GMT)

• US Sep. New Home Sales (1400)
• Canada Bank of Canada Monetary Policy Report (1430)
• US Weekly DoE Crude Oil and Product Inventories (1430)
• US FOMC Rate Decision (1815)
• New Zealand RBNZ Official Cash Rate (2000)