Strong US data challenges USD rally

First the USD rises sharply on the delay in Greece bailout negotiations, but then another round of very strong US data boosts risk sentiment and punishes the greenback. Another nervous weekend lies ahead despite the intraday turnaround.

Risk off and JPY off, too
(This paragraph written prior to US data releases) The further delay in Troika/Greece bailout efforts until Monday has risk in a rather sour mood, with the Euro and the traditionally most pro-risk currencies competing for the status of weakest currency among the G-10. The US dollar is of course at the top of the league in these circumstances as it clearly remains the mirror image for risk appetite, particularly as the BoJ’s recent powerful easing moves have deterred the market from piling back into the Yen despite the strong bond market and the risk-off atmosphere of the last couple of days. USDJPY appears more firmly clear of the resistance and is now well through its 200-day moving average at 78.00. Still, if risk continues to consolidate lower on the latest developments rather than continuing higher on the QE meme, other JPY crosses may quickly run into resistance (one of my favourite indicators on this is the gold market – which feeds on this theme very directly and has been very weak over the last 24 hours.)

Chart: EURJPY
EURJPY is at an interesting crossroads on the downside here as the negative news of the delay in a more definitive outcome for Greece competes with BoJ easing profligacy, contributing to a race to the bottom for EUR and JPY. It would appear the EUR is winning at the moment, with the 102.00 are as a key pivot zone for EURJPY. To the upside, the upper edge of the Ichimoku daily cloud is rapidly falling and provides some interest.

Aussie takes a breather.
The reaction to the Australian employment report shows that when it is time for a heavily positioned market to consolidate, virtually no fundamental influences can stand in the way. In other words, perfection is priced in for Australia, so even supportive data and developments fail to maintain the AUD rally. Besides the strong employment report out overnight (which wasn’t particularly strong in the details, as Andrew Robinson pointed out) (http://www.tradingfloor.com/posts/australian-jobs-data-looks-strong--but-details-not-so-impressive-734121091) , another support for the Aussie came as RBA deputy governor Lowe was out speaking and expressed the belief that prices for global goods are not likely to fall over the medium term, “particularly as the effects of the exchange rate appreciation dissipate.” Note the lack of concern for the very strong Aussie and the belief that it is somewhat useful in countering the risks of inflation. While it is clear that the Aussie rally was curtailed by ongoing nervousness in global risk appetite, it is also worth noting that the December Australia STIR futures rallied 10 ticks after selling off toward the bottom of the recent range. It looks like Aussie pairs may be capped for a while now and the question is whether we get a consolidation or a deep enough sell-off to begin to ponder a top in the near Aussie-bubble.

Odds and Ends
The Riksbank cut the headline rate 25 bps to 1.50% as most expected as the central bank continues to fret the effect of the Euro Zone crisis on Sweden’s export economy. Swedish inflation remains very muted (note today’s release) as the krona has powered stronger versus the single currency over the last couple of months. As well, the bank lowered its forecast for the rate to 1.5% at the beginning of 2013 vs. 1.8% previously, though the market has already predicted that the rate is likely to be at around 1.00% in a year’s time. Many, including us, have talked about the potential for the krona to behave like a safe haven, but the real test for that proposition hasn’t yet come as global markets have been in a very complacent mood over the last two to three months and the small rally here in EURSEK despite the very weak Euro underlines the importance of the 8.75 support in EURSEK.

The FOMC minutes last night failed to raise eyebrows – or at least failed to stimulate much market reaction. While it is easy to comb over the minutes for hints at the degree of commitment to the “late 2014” expectations, there was no new takeaway for the short term, other than that it is rather clear that if current positive data trends don’t hold, the Fed will be ready as always to swoop in with a QE3.

US Data – an interesting mix of US data today, as the core PPI remained at elevated levels rather than dropping and the weekly jobless claims number came in at its lowest level for the cycle and since early 2008. The strong NAHB number yesterday (best since early 2007!) underlines the trend toward normalization in the US housing market and tipped us off to the strong Housing Starts and Building Permits number for January.

Looking ahead
The kneejerk reaction to the strong US data is of course….USD weakness as the revolting correlations mean that good data is risk on and risk on is USD negative. But let’s see if the overhang from the negative developments for the Euro Zone outweigh this latest batch of strong data. Very high oil prices are also providing a headwind for further strength in the US data from here.

Gasoline prices at the pump in the US are the highest they have ever been for this time of year (low seasonal demand and cheaper winter grades of gasoline) and risk ramping sharply higher into April/May if crude oil prices don’t come down from here. Brent crude is trading within a couple of dollars of its highest levels since the 2008 spike as geopolitical tensions are providing a large premium.

The weekly Bloomberg consumer comfort survey results are up shortly. This survey ‘s results have worked higher to the upper end of the range since mid-2008 – could confidence breakout to the upside as well? We’ve been so well trained to expect disappointment on this front and the confidence picture is confusing, particularly after the horrendous drop in the Conference Board monthly number in January.

Later today, watch for the second major US regional manufacturing survey, the Philly Fed for confirmation or note in the continued strength of the US manufacturing sector. Tomorrow, we have UK Retail Sales, and Canada and US CPI data. The core US CPI is a key one to watch as any further acceleration to the upside begins to hamper the US Fed’s freedom to act.

Economic Data Highlights

• UK Jan. Nationwide Consumer Confidence out at 47 vs. 40 expected and 38 in Dec.
• New Zealand Feb. ANZ Consumer Confidence out at 113.3 vs. 116.1 in Jan.
• Australia Jan. Employment Change out at +46.3k vs. 10k expected and -35.6k in Dec.
• Australia Jan. Unemployment Rate out at 5.1% vs. 5.3% expected and 5.2% in Dec.
• Sweden Riksbank lowered Interest Rate 25 bps to 1.50% as expected
• Sweden Jan. Headline CPI out at -0.9% MoM and +1.9% YoY vs. -0.5%/+2.3% expected, respectively and vs. +2.3% yoY in Dec.
• Sweden Jan. Underlying Inflation out at -0.7% MoM and +0.9% YoY vs. -0.5%/+1.1% YoY expected, respectively and vs. +0.5% YoY in Dec.
• Norway Q4 Mainland GDP out at +0.6% QoQ vs. +0.5% expected and vs. +0.8% in Q3
• Canada Dec. International Securities Transaction out at +7.38B vs. +10B expected and vs. +14.6B in Nov.
• Canada Dec. Manufacturing Sales out at +0.6% MoM vs. +2.0% expected
• US Jan. Producer Price Index out at +0.1% MoM and +4.1%% YoY vs. +0.4%/+4.1% expected, respectively and vs. +4.1% YoY in Dec.
• US Jan. PPI ex Food and Energy Index out at +0.4% MoM and +3.0% YoY vs. +0.2%/+2.7% expected, respectively and vs. +3.0% in Dec.
• US Weekly Initial Jobless Claims out at 348k vs. 365k expected and 361k last week
• US Weekly Continuing Claims out at 3426k vs. 3495k expected and 3526k last week
• US Jan. Housing Starts out at 699k vs. 675k expected and vs. 689k in Dec.
• US Jan. Building Permits out at 676k vs. 680k expected and vs. 671k in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly Bloomberg Consumer Comfort (1445)
• US Feb. Philadelphia Fed (1500)
• China Feb. Flash MNI Business Sentiment Survey (0135)