Ahead of the US open, bonds are pulling higher and equities are looking wobbly as the USD pushes at interesting technical levels. The JPY is not sitting this rally against the pro-risk trades out this time around. What gives?
EU bailout deal
EU finance ministers announced the EUR 78 billion bailout deal for Portugal yesterday and pressured Greece to work harder if it wants to better its chances at improved aid terms (see our Beecroft’s article on Greek brinksmanship here – an interesting idea, if true). A key side story to the main headline about the Portugues bailout particulars was the an announcement by the EU’s Juncker that the EU would consider a “soft restructuring” of Greece’s debt, which seems to mean an extension of debt maturities and other measures in exchange for the sale of Greek assets, and not a real restructuring. See more in this Bloomberg article.
The reaction to the outcome of the FinMin summit was not particularly celebratory late yesterday. Today, EURUSD tried at one point to work up some excitement about the latest hawkish musings of the ECB’s Bini Smaghi, but failed to sustain altitude once again as the rally was sold into. Nothing seems to be happening on the risk spread/rate spread front to give any directional indicators, leaving us scratching around for what might trigger the next move in the pair. That being the case, the action may simply take a cue from the overall direction in risk appetite, which remains at a nervous levels as the US S&P teeters at key support and AUDUSD mulls the 1.0520/40 support zone.
UK Inflation
Another uncomfortably high inflation data point is heating up the seats once again at the Bank of England as it is tough to recall any other time in history when year-on-year headline inflation was nine times the central bank’s policy rate: talk about impoverishing savers! The market has grown tired of inflation readings, however, as the more important question is what the Bank of England will do about them and high inflation with low policy rates is the worst of all worlds for a currency. BoE expectations failed to move more than a couple of basis points on today’s news and GBP was only prodded into a minor rally that was quickly pushed back (right at the 55-day moving average in GBPUSD at around 1.6290 one should note). The BoE will certainly need to hope that they are right to look through what Bernanke has called “transitory” inflation – they’ve been trying to do it for . Later this week we have the UK retail sales, and a number of seasonal factors suggest that it may be a strong number, but the pound will need for Euro to remain under pressure and for risk appetite to remain under pressure as well, it seems, to take out the key 0.8675 area support.
JPY
The Yen is weaker today as it seems the market is finding little reason to press the currency’s rally further as USDJPY failed to find any momentum in the 80 area and with the bond rally on hold and even consolidating a bit in Europe, where the front end of the curve has gone nowhere in over a week. In Japan, there are policy rumblings on the need for social security and tax reforms and there is the entire idea “out there” that this tsunami/earthquake catastrophe may finally push Japan into real reform after years of failing to come up with new ideas for addressing its long term malaise.
In USDJPY, the break to new two week highs is interesting on a local basis, but a number of important resistance areas are stacked above the current price, so there is some heavy lifting for the pair to do if the technical view is to shift higher here. In the chart below, notice the 55-day moving average (read line) Ichimoku daily cloud resistance and 200-day moving average.
US Data
The US April housing starts data disappointed by falling to the lower end of the last year’s range and the building permits data was likewise anaemic. US Industrial Production and Capacity Utilization are up shortly, and late in the US session we have a look at the API readings of the crude oil and product inventories. The very low gasoline inventories of late have been a fundamental support for the high gasoline prices and, while we’re almost 50 cents off the highs in the commodities, US consumers have only seen about five of those cents dropping at the pump. A drop in gasoline prices as driving season gets under way in earnest later this month could offer a sentiment boost for US consumers.
USDCAD
Though not particularly supported by the latest moves in interest rate spreads, we’ve seen a fairly convincing technical break in USDCAD as the 0.9675 area was taken out in recent day. Progress is halting, but the technical break could open up for a test higher toward the parity level if it holds (and the S&P breaks down a bit further and a lid stays on oil prices here.) By coincidence, the 200-day moving average is also up around parity and the pair has been trading below that MA since September of last year.
Looking ahead
The US House of representatives is in recess this week, so we won’t be getting any new budget deals from US lawmakers this week and possibly not until June or even July, but every passing day makes the issue more pressing.
It’s tough to see what is supposed to provide a catalyst in the here and now. Sometimes in such circumstances, the actual moves in the market tell their own story and strong technical breaks in the absence of a direct known catalyst are often the best signals of all. As we go to press, the pressure is heating up on the risk off trade as the long bond is moving back into a rallying stance and equity futures are looking wobbly ahead of the US open.
Tomorrow we have the BoE Minutes and the FOMC minutes from the last meetings of the two central banks.
Be careful out there.
Economic Data Highlights
- China Apr. Actual FDI outa t +15.2% YoY vs. +36.1% expected and +32.9% in Mar.
- Sweden Apr. Average House Price fell to 2.035M vs. 2.057M in Mar.
- UK Apr. CPI out at +1.0% MoM and +4.5% YoY vs. +0.7%/+4.1% expected, respectively and vs. +4.0% YoY in Mar.
- UK Apr. Core CPI out at +3.7% YoY vs. +3.2% expected and +3.2% YoY in Mar.
- UK Apr. RPI out at +0.8% MoM and +5.2% YoY as expected and vs. +5.3% YoY in Mar.
- UK Mar. DCLG UK House Price rose +0.9% YoY vs. +0.5% in Feb.
- Germany May ZEW Survey fell to 3.1 vs. 4.5 expected and 7.6 in Apr.
- EuroZone May ZEW Survey fell to 13.6 vs. 17.3 expected and 19.7 in Apr.
- Canada Mar. International Securities Transactions out at 6.3B vs. 5.0B expected and 2.5B in Feb.
- Us Apr. Housing Starts out at 523k annualized vs. 569k expected and 585k in Mar.
- US Apr. Building Permits out at 551k annualized vs. 590k expected and 574k last month
Upcoming Economic Calendar Highlights (all times GMT)
- US Apr. Industrial Production (1415)
- US Apr. Capacity Utilization (1315)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Q1 Producer Prices (2245)
- Australia May Westpac Consumer Confidence (0030)
- Australia Q1 May DEWR Skilled Vacancies (0100)
- Australia Q1 Wage Cost Index (0130)