28 October 2010 at 14:31 GMT
The USD sells off again as yesterday’s rally proved overambitious. Equities are pushing the upside envelope again in sympathy, though lackluster action in gold tells us that the QE anticipation is weaker than previously. Also – was that an oink we just heard from the PIGS?
Bank of Japan meeting
As telegraphed previously, the Bank of Japan announced that its purchases from now on would include lower grade paper than it purchased earlier, including BBB corporate bonds and a-2 commercial paper. The bank also moved forward the next BoJ meeting to November 4-5, a mere week from now, so that the bank can be ready to react to the outcome of the FOMC meeting on November 3 – next Wednesday. Gee, do you think there is a slight bit of anticipation leading into that FOMC meeting? The reaction in the market was that this offered no real surprise and the JPY strengthened marginally against the USD overnight, though less so than the higher beta currencies of late. The USDJPY move lower has also been supported by a renewed drop in yields at the short end of the US yield curve.
RBNZ - a yawn with a hawkish twist
No real surprises from the RBNZ, but just enough of a hawkish nudge to pull forward expectations a few bps higher after the Bollard mentioned that while it was appropriate to leave rates alone for now, “it remains likely that further removal of monetary policy support will be required at some stage.” Looking at NZD crosses, it appears that AUDNZD has not priced in the relative move in interest rates and could be vulnerable to further downside from here if the pair tracks interest rate spreads as closely as it has in the past.
QE Survey
The New York Fed was out surveying the major banks in an effort to gauge the market’s expectations on the size of the coming QE. This may have added to USD a bit today if the idea is that the Fed would like to one-up expectations in order to ensure that the impact of the QE announcement is felt immediately. Here is a Bloomberg article that looks at a number of important aspects of the Fed’s upcoming QE announcement. One of the key issues is the duration at which the Fed plans to purchase and some have asked whether there are enough available treasuries to buy when the Fed begins to make its purchases. The baseline expectation is that the Fed will purchase in the neighborhood of $80-100 billion per month, according to a separate Reuters survey.
PIIGS wallowing in the mud
There are fresh signs of renewed worry at the EuroZone periphery, as debt spreads have widened rather sharply over the last couple of days in Greece, Portugal and elsewhere. Yesterday, budget talks in Portugal collapsed. China is now running around with a follow up on its previous charm offensive, saying that it might buy Portuguese debt. This is a bald attempt to distract attention from its undervalued currency. This is not getting much attention in the currency market if we look at the Euro, and there are no real signs of safe harbor seeking in German treasuries. The 2-year German yield is up over 103 bps, the highest level since April. This issue has to get some attention again soon – perhaps after next week’s fireworks? PIMCO’s chief Mohamed El-Erian said this week he thinks it likely that Greece will default on its debt within 3 years.
Chart: EURUSD
EURUSD is consolidating with a higher low yesterday coming after a lower high previously. The 21-day moving average is under assault from the downside this morning. The strong rally from the lows suggests that the market is looking for the main events next week before breaking the range. The battle lines are certainly drawn at thie point to the upside and downside.
Looking ahead
The USD is on a weak footing so far today and will encourage those who believe that the market will be range-bound here and that we don’t risk any breakout in the ranges (1.0350 topside in USDCAD, 1.3700 downside in EURUSD, 0.9650 downside in AUDUSD) ahead of the FOMC meeting is behind us. The precious metals market is bouncing back today as well – but we need to get a lot more upside there if we are to believe that the market is really chomping at the bit again on QE and its implications for currency devaluation.
The low weekly jobless claims number released today is encouraging for the US employment picture, but likely not enough to sway the Fed this time around, which is looking at 14 months of 9.5% and worse unemployment levels when making its decision. Still, let’s hope that falling claims will continue to fall and that the US economy will gain enough momentum to keep the Bernanke and Dudley FOMC contingent on the defensive.
Remember that tomorrow is the last trading day of the month, with the usual risk of one-off end of month fixing flows. Interesting, there were few signs of odd activity last month despite the very large move in bonds and especially equities for the month.
Watch out for the rash of data out of Japan tonight as well. Headline CPI appears to be rapidly climbing toward zero again in Japan - which makes sense considering the rash of commodity price rises we are seeing almost across the board. This trend is not evident in the core data just yet, however.
Economic Data Highlights
- New Zealand RBNZ left rate unchanged at 3.00% as expected
- Australia Aug. Conference Board Leading Index rose +0.2% vs. +0.8% in Jul.
- Japan Sep. Retail Trade fell -3.0% MoM and rose +1.2% YoY vs. -0.5%/+3.2% expected, respectively
- UK Oct. Nationwide House Prices fell -0.7% MoM and rose +1.4% YoY vs. -0.3%/+2.3% expected, respectively and vs. +3.1% YoY in Sep.
- Sweden Oct. Consumer Confidence out at 23.4 vs. 28.0 expected and 28.4 in Sep.
- Sweden Sep. Retail Sales rose +0.8% MoM and +5.5% YoY vs. +0.5%/+4.2% expected, respectively and vs. +4.5% YoY in Aug.
- EuroZone Oct. Consumer Confidence steady at -11 as expected
- EuroZone Oct. Industrial/Services Confidence out at 0/8 vs. -1/7 expected and vs. -2/8 in Sep.
- UK Oct. CBI Reported Sales out at 36 vs. 35 expected an 49 in Sep.
- US Weekly Initial Jobless Claims out at 434k vs. 455k expected and 455k last week
- US Continuing Claims out at 4356k vs. 4430k expected and 4478k last week
Upcoming Economic Calendar Highlights
- New Zealand Sep. Building Permits (2145)
- New Zealand Sep. Trade Balance (2145)
- UK Oct. GfK Consumer Confidence (2301)
- Japan Oct. Nomura/JMMA Manufacturing PMI (2315)
- Japan Sep. Jobless Rate (2330)
- Japan Sep. Overall Household Spending (2330)
- Japan Sep. National CPI (2330)
- Japan Sep. Industrial Production (2350)
- Australia Sep. HIA New Home Sales (0000)
- Australia Sep. Private Sector Credit (0030)
- China Oct. MNI Business Condition Survey (0135)
- Japan Sep. Housing Starts (0500)