04 January 2011 at 16:02 GMT
A few signs of profit taking are emerging after the crazy pre-New Year’s runup on some of the pro-risk and anti Euro-trades. More mean reversion to come or are we just seeing a couple of days of nervousness before the Bulls regain their legs?
There is an awful lot of action in this market on a relative dearth of interesting fundamental inputs. Yesterday’s status as the first day of more normal trading conditions and a fresh start for the new financial year for many saw an understandable consolidation of many of the pro-risk FX trades and anti-Euro trades, considering the enormous moves/squeezes we saw last week on only a trickle of trading volume. The most volatility crosses were CHF-crosses – as the correction lower in the CHF is in direct proportion to the wildness of last week’s squeeze.
It was interesting to see this consolidation in these trades even as equity markets somehow found fresh legs for a blow-off rally. The upside in equities, from Asia to New York, was not echoed in currency crosses like AUDUSD, which briefly breached the earlier 2010 highs in a crazy runup, only to consolidate sharply yesterday and into today, wiping out much of the rally from the last week of last year and creating an interesting technical reversal. This pattern was also seen in some of the commodities complex, though not at all in equities, which have mostly been sharply higher around the world (perhaps celebrating a stabilization in the bond market and the easing lower of commodities). This represents an interesting divergence now in commodities and equities, which is a welcome development for inter-market traders, since previously (for much of last year) it seemed that everything simply moved in one hyper-correlated trade that offered no real room for portfolio diversification (or common sense for that matter, as we suggested that eventually, higher rates and commodities prices had to be risk negative).
Still, this is very early days for the New Year, but after the crazy run-up at the end of the year, the return of “normal” trading conditions is welcome and we relish contemplating what will happen in the year ahead, as 2011 promises to be an interesting one for markets. On that account, and somewhat sympathetic with our views for 2011, we noted an interesting article from Bloomberg this morning on the fate of carry trades this coming year. Definitely worth a read (the title of the article is “Currency Carry Trade Losses May Bolster USD Dollar” – the current URL as of this writing contains the wrong article title, so we wouldn’t want to post a link that goes bad – so you can Google the title in Google News.).
Chart: AUDUSD
AUDUSD has corrected sharply lower after a wild squeeze to end the year on thin liquidity and possible barrier-hunting. This has created a classic technical reversal, though it’s hard to take what happened last week at face value and we’d like to see a deeper cut back well below parity before we begin to suggest that a larger scale reversal is on for the Aussie. It was certainly no help for the currency to see another awful Manufacturing PMI result, which continues to bear out the idea that the Australia economy is a one-trick pony centered on the mining industry. Up Thursday, we have the services industry PMI, which was a wan 46.2 in November. The manufacturing and services surveys suggest that the economy outside of the mining sector is in a virtual recession.
Chart: EURUSD
EURUSD was rejected today at an absolutely pivotal area around 1.3435 – an area defined by the action since November, when a major low formed there. Note the 55-day moving average just below 1.3500 as well. To the downside, the strategic focus is the 200-day moving average, which provided the recent support zone.
Looking ahead
The economic calendar offers plenty of interest for the rest of the week, with US ISM Services on tap tomorrow (the November number was very solid) and the US employment report on Friday. Later today we get the final FOMC minutes for 2010. We’re not expecting much of interest from the FOMC until the January 26 monetary policy statement and subsequent minutes, where we get a chance to see how the new hawks and semi-hawks (local Fed presidents Fisher, Plosser and Kocherlakota) are making their presence felt on the committee.
Economic Data Highlights
- Australia Dec. AiG Performance of Manufacturing fell to 46.3 vs. 47.6 in Nov.
- Norway Dec. PMI out at 54.4 vs. 55.7 in Nov.
- Germany Dec. Unemployment Change rose +3k vs. -15k expected and -8k in Nov.
- Germany Dec. Unemployment Rate steady at 7.5% as expected
- UK Dec. PMI Manufacturing out at 58.3 vs. 57.2 expected and 57.5 in Nov.
- UK Nov. Mortgage Approvals out at 48.0k vs. 46.5k expected and 47.3k in Oct.
- US Nov. Factory Orders out at +0.7% MoM vs. -0.1% expected
Upcoming Economic Data Highlights (all times GMT)
- US FOMC Meeting Minutes (1900)
- US Weekly API Crude Oil and Product Inventories (2130)
- US Weekly ABC Consumer Confidence (2200)
- US Dec. Domestic and Total Vehicle Sales (2200)
- Australia Nov. HIA New Home Sales (0000)
- China Dec. HSBC Services PMI (0230)