Traders are “friending” intervention hopes ahead of the weekend

On Facebook IPO day, this market desperately wants to believe in a strong new intervention as we head into this G-8 weekend – are the hopes justified? There’s still a lot to worry about as EU faces either/or time.

Bend or break?
Today’s market has traders jumping up and down in expectation of a strong intervention move – possibly as early as over the weekend as we have a G-8 summit on tap. This impulse to wildly bid up gold and take back heavily sold-off assets is quite understandable, given the Pavlovian response pattern of officialdom we have seen time and again over the last several years every time stress levels become unbearable. But while it is understandable to expect the Bernanke Fed to move again on sufficient evidence of strain (though I would caution against the belief that the Fed is ready to do anything particularly forceful for the next several months, as we have an election season on), the EU situation is rather different: it is fast approaching either/or time for the EMU. The easy extend-and-pretend solutions have largely been exhausted and now it is time for Germany to make a decision. Either Germany opens up the chequebook, or the EU “periphery” will soon become the EU asteroid belt, splitting off and doing its own thing as it will become increasingly clear that it is in their interest as long as Germany maintains the disciplinarian approach.

With that as the framework for the next critical move by EU politicians, we have to consider the non-trivial odds that something “breaks” here. Greece is the obvious break-point for now – and they are fast running out of funds. To we get a break even before the June elections or do we see an emergency package aimed at shoring up the country for a few weeks until a new leadership has been put in office and can thus act as a counterparty in negotiations.

And what are the outcomes for the Euro either way? It’s very hard to tell with the breakup scenario, but the Euro would generally be weaker due to the mass confusion of what the “single” currency actually is and might become with the fear that not only Greece, but other peripheral nations will hive off and reintroduce their new/old and devalued currencies. Eventually, however, the remaining semi-DEM would likely be a very strong currency rather than a weak one. (As I have said in past posts, Germany will either pay now by opening up the chequebook or it will pay later as its currency spirals into the clouds and harms its competitiveness).

Odds and ends
A very worrying story overnight from Reuters () quotes the Australian bank ANZ complaining that wholesale funding for Australian banks has dried up. This shows the degree to which the crisis in the EU can quickly morph into a global contagion in financial markets. It’s worth noting the very sharp sell-off in Australia bank share overnight, as their operations will be threatened if this freeze continues and would then necessitate dramatic easing measures from the RBA. This is yet another threat to the Aussie, which has already been under pressure of late on compressing interest rate spreads and risk aversion.

Reuters ran a story discussing a possible change of heart from the BoE’s Posen, who was a prominent dove that briefly flirted with a more optimistic view of the (or was his change of heart a knee-jerk reaction to the scary acceleration in oil prices that has now so suddenly come unwound?). Either way, this again underlines that any lasting divergence in the monetary policy stance of the Fed and the BoE is unlikely and that the UK is far more directly exposed to a weak economy on the continent, all of which is likely to keep GBPUSD capped and rangebound at best, and possibly probing down toward the 2012 lows toward 1.5300 in coming weeks at worst. 1.6000 is the upside resistance if the market gets its hopes up further on the coordinated intervention front.

The Canadian CPI data surprised a bit to the upside, but Canadian short rates took a big hit yesterday and the rally in rates today after this data point has been relatively modest so far. This number will not be enough to put USDCAD on a course that is independent from the swings in risk appetite and crude oil.

Chart: USDCAD
It’s often worth zooming out and having a look at the bigger perspective. In USDCAD, the daily chart looks rather volatile, but if we zoom out to a monthly, we can see that the pair may have only just gotten started, if we look at the magnitude of previous moves. Note the head-and-shoulders-ish feel to the situation and the 1.10 area looks like a potential longer term magnet.

Looking ahead
Plenty of uncertainty despite today’s bounce – so stay tuned – Monday could see a rather chaotic opening depending on this weekend’s events. I will say no more for now, other than that one should be very careful out there, as usual.

Economic Data Highlights

• Germany Apr. Producer Prices out at +0.2% MoM and +2.4% YoY vs. +0.3%/+2.5% expected, respectively and vs. +3.3% YoY in Mar.
• Italy Mar. Industrial Orders out at +3.5% MoM and -14.3% YoY vs. -13.2% YoY in Feb.
• Canada Apr. Consumer Price Index out at +0.4% MoM and +2.0% YoY vs. +0.3%/+1.9% expected, respectively and vs. +1.9% YoY in Mar.
• Canada Apr. Core CPI out at +0.4% MoM and +2.1% YoY vs. +0.2%/+1.9% expected, respectively and vs. +1.9% YoY in Mar.

Upcoming Economic Calendar Highlights (all times GMT)

• UK May Rightmove House Prices (Sun 2301)
• New Zealand Apr. Credit Card Spending (Mon 0300)