Sterling on a steep slide

FX Update: Sterling on a steep slide

Yesterday we speculated whether risk was on the verge of the abyss, and for a while in the early hours of yesterday's US session, it seemed it was, and the JPY pounded the market with its strength and commodity currencies reeled. But then the sour mood just as suddenly dissipated and risk rallied strongly into the US close and developments went into full reverse, save in the bond market, where we saw a gentle consolidation after the final large bond auction of the week (of 7-year t-notes) went off with strong demand. The action makes for a confusing picture for risk to say the least, as we continue to eye that 55-day moving average in the S&P as an important line in the sand. Other risk indicators are still pointing south, so there is plenty of dissonance out there at the moment.

Pound loses more ground
The 200-day moving average in EURGBP gave way yesterday and it was like the dike breaking as the pound was knocked for further heavy losses overnight and in today's European session. The negative adjustment to the year -on-year GDP level and especially perhaps the adjustment to Gross Fixed Capital formation to the lowest level in a generation save for one ugly reading back in the mid-80's.  It is a critical blow for the pound to have lost so much ground against the lowly Euro, for which sentiment could hardly be lower.

Chart: GBP vs. G-10
Our measure of the pound vs. an evenly weighted basket of the rest of the G-10 currencies shows the currency pushing new all-time lows today - will the currency be able to find support as it did the last time near these levels or is the currency a lost cause? The psychological level at 1.5000 in GBPUSD looms.

Euro
A modest (in volatility terms) bullish pattern reversal yesterday in EURUSD saw a small further rise to local resistance just above 1.3600, but much of that rally was already unwound ahead of the US data this morning. The Independent cited Greek sources as saying that the EU mission sent to inspect the fiscal situation will say that Greece will miss its targets for deficit reduction. The EU Commissioner Rehn will be traveling to Athens next week. Spreads on Greek debt were actually slightly improved today, as were CDS prices that bet on the odds of a Greek default.

US Growth farce
Q4 US Growth was adjusted up another couple of notches to 5.9% Annualized from the original 5.7% estimate. This at a time when worker utilization is near record lows and underemployment is at a record highs. There is nothing to toast in this number except the fact that it helps to undermine the credibility of this silly measurement of the economy. There should be little reaction to this data.

Looking ahead
Don't forget that this is the final trading day of the month, so some of today's moves could be about end-of-month fixing after a fairly volatile month for risk (though not so much for government treasuries).

Chart: USDCAD
USDCAD is at an interesting inflection point ahead of this week after this week's rally attempt. Note the symmetry of recent waves and how the 0.764 Fibo has been the key retracement level twice now. First, on the major turnaround wave from the 1.0225 low to the 1.0780 high (0.764 retracement at 1.0357) and now on the move from that 1.0780 high to the retracement low at 1.0370, which saw a high right on the 0.764 retracement at 1.0683. That latter resistance level is key if USDCAD is ever to take flight (followed by the rapidly falling 200-day moving average)

Gold has rebounded strongly on a story/rumor that China plans to buy all 190+ tons of gold that the IMF announced it would be selling to boost its deployable funds. Official sources are not denying this story, but there may be a grain of truth in it. This is keeping Aussie elevated, though the Australia dollar looks too strong relative to other risk indicators. We will have an interesting week next week for Aussie.

Next week is the usually hectic first week of the month, with the heavy US economic data calendar (ISMs and employment report) as well as 4 central bank meetings (RBA, BoC, BoE, ECB). Since we didn't quite get a resolution this week (at least here ahead of the Friday US session we haven't...) on the next big leg for risk in the market, this heightens the potential for next week's volatility, considering this heavy load of event risks

Economic Data Highlights

• New Zealand Jan. Trade Balance rose to +269M vs. -100M expected and -32M in Dec.
• New Zealand Jan. Building Permits fell -2.8% MoM vs. +2.2% expected
• Japan Feb. Nomura/JMMA Manufacturing PMI out at 52.5 vs. 52.5 in Jan.
• Japan Feb. Tokyo CPI ex Fresh Food and Energy out at -1.3% YoY vs. -1.5% expected and -1.4% in Jan.
• Japan Jan. National CPI ex Fresh Food and Energy out at -1.2% YoY as expected and vs. -1.2% in Dec.
• Japan Jan. Industrial Production out at +2.5% MoM and +18.2% YoY vs. +1.0/+16.5% expected, respectively
• Japan Jan. Retail Trade rose 2.6% YoY vs. -0.2% expected and -0.2% in Dec.
• UK Feb. GfK Consumer Confidence rose to -14 vs. -17 expected and -17 in Jan.
• Japan Jan. Housing Starts fell -8.1% YoY vs. -11.6% expected and -15.7% in Dec.
• Japan Jan. Construction Orders rose 15.7% YoY vs. +0.6% in Dec.
• UK Feb. Nationwide House Prices fell -1.0% MoM and rose +9.2% YoY vs. +0.4/+11.0% expected, respectively
• Sweden Jan. Retail Sales rose 1.7% MoM and +5.1% YoY vs. +0.8/+3.9% expected, respectively
• Sweden Jan. Trade Balance out at +7.5B vs. +8.0B expected and +4.5B in Dec.
• Norway Q4 Manufacturing Wage Index rose +0.8% QoQ vs. +0.2% in Q3
• UK Q4 GDP out at +0.3% QoQ and -3.3% YoY vs. +0.2/-3.1% expected, respectively
• UK Q4 Gross Fixed Capital Formation fell -3.1% vs. +0.2% expected
• EuroZone Jan. CPI fell -0.8% MoM and rose +1.0% YoY as expected
• EuroZone Jan. Core CPI rose +0.9% YoY vs. +1.0% expected and +1.1% in Dec.
• Switzerland Feb. KOF Swiss Leading Indicator rose to 1.87 vs. 1.8 expected and 1.81 in Jan.
• Canada Q4 Current Account fell to -$9.8B v. -$8.5B expected and -$13.8B oin Q3
• US Q4 GDP estimate adjusted up to 5.9% annualized, vs. 5.7% original estimate.

Upcoming Economic Calendar Highlights

• US Feb. Chicago PMI (1445)
• US Feb. Final University of Michigan Confidence (1455)
• US Jan. Existing Home Sales (1500)
• US Feb. NAPM Milwaukee (1500)
• US Fed's Dudley, Kocherlakota to Speak (1545)
• US Fed's Tarullo, Evans to Speak (1830)
• New Zealand Jan. Visitor Arrivals (Sun 2145)
• Australia Feb. AiG Performance of Manufacturing Index (Sun 2230)
• Australia RBA's Governor Stevens to Speak (Sun 2245)
• Australia Jan. HIA New Home Sales (Mon 0000)
• Australia Q4 Current Account Balance (Mon 0030)
• China Feb. PMI Manufacturing (Mon 0100)
• China Feb. HSBC Manufacturing PMI (Mon 0230)