08 September 2010 at 21:29 GMT
Risk tried to pick back up on the rally impulse established late last week with mixed success. USDJPY posted an interesting reversal from the fresh 15-year lows of the Asian session. Is the eternal grind lower ready for a pause?
USDJPY reversal
The USDJPY grind lower since early June has been an amazing thing to watch for its persistence and lack of meaningful retracement. Still, the latter phases of the grind lower have been market by steep backups whenever a new low trades, as if this market's conviction is a bit iffy at these levels. We've gone over the drivers for the JPY rally and why it can theoretically continue on for a long time yet based on yield spread tightening if bonds rally again, but the contrarian in us can't help but continue to look over at the lopsided speculation out there and wonder if the two way risks are far greater than market positioning suggests they are? The JPY shorts in the US CFTC report for last week were at record lows while longs were at the high end of the range. The last time JPY shorts were almost this scarce before recent weeks was in February of 2009, just befor USDJPY launched a 14 big figure rally. How that is supposed to fit with the bond/equity picture, it is tough to tell, it's just an interesting isolated fact.
Chart: USDJPY
The hammer formation in USDJPY comes after a remarkable three months of grinding lower and lower with little in the way of retracements. Note how the three previous hammers have resulted in at least modest rallies in USDJPY.
The return of super-CAD?
CAD took off like a rocket today as the BoC's hawkish performance was underlined by a ridiculously strong Ivey PMI number shortly afterwards that was particularly surprising since last months number was very weak for the time of the year. If we are able to take out the 200-day moving average in the major equity indices and the market continues to price in further rate adjustments higher from the BoC then we are possibly looking at a full test at the well defined lower end of the range at 1.0150, though 1.0340 needs taking out first. While the BoC announcement today was important, it wasn't exactly earth-shattering, as, for example, the September 2011 Canadian Banker's Acceptance STIR has merely reverted to where it closed a couple of days ago.
US data
The August beige book release from the Fed took some of the steam out of the risk rally today, as the book noted "widespread signs of deceleration". Much of the weakness was in the easter half of the US. US Jul. Consumer Credit was slightly better than expected, though there was still an overall decline of -$3.6 billion for the month. See our chart from this morning () for a look at the secular decline in US credit.
Looking ahead
Tomorrow, US President Obama is set to make a "jobs speech" in Cleveland. This will be his big chance to try to set in motion a change of sentiment ahead of the November 2 election. It is also a chance, therefore, for the market to get some kind of new stimulus that it seems to be pricing in. This could be a key inflection point for markets.
Tonight, we have the Australian employment report for August. Tomorrow we have the UK Trade Balance and BoE meeting on tap and Canadian housing starts for August, as well as Canada and US trade figures for July and US weekly jobless claims.
Be careful out there.