FX Closing Note: Uncle Ben pulls a fast one
A hat-trick of USD supportive news items finally gave the greenback a sizable shot in the arm today:
The FOMC wasn't over yesterday.
The Fed apparently had more business to take care of after its two days of deliberation than it could even fit into its relatively lengthy FOMC statement as today it announced that it would be reducing the size of two of its liquidity facilities in coming months - the TAF the TLSF , both aimed at providing short term liquidity to banks, the first through a competitive auction process, and the second a special facility for the "too-big-to-fails". This move certainly shows that the Fed believes the financial system is stable enough to further withdraw some of the liquidity-inducing facilities that were created during the intense crisis phase.
Existing Home Sales disappointing
This was an especially disappointing development for risk appetite considering the huge support from the Fed of the mortgage market (buying 80% new mortgages being issued at the moment) and the fact that the tax credit that is supporting a flurry of home buying activity by first time buyers is running out in the coming two months. The 5.10M annualized rate vs. 5.35M expected and 5.24M in July ruined the streak of improvements in sales running since March of this year. This hit risk appetite as it spoiled the recovery story.
7-year auction went swimmingly
As we suspected, the longer duration of the paper at this auction and its timing after the Fed meeting emboldened buyers, as the record $29 billion of 7-year notes was heavily oversubscribed (2.79 bid to cover) and saw a final yield lower than anticipated. This underlined the rejection of the idea that investors are so worried about the US' fiscal situation that they are unwilling to buy up public debt - as we have long highlighted that the theoretical themes here don't really jibe with market reality. In general, this whole episode in the market smacks of pure risk taking in the assumption that it is safe to do so due to a complacent fed that is encouraging reflation through very long term low rates and currency devaluation. The bond market is saying: what if there is no recovery?
Moves in gold and especially oil are also offer heavy sentiment boosts for the USD - as it defuses the whole reflexive commodity/oil price action. The one upbeat data point today was the weekly initial jobless claims number as we are soon entering the critical season for the job market. Still, at least one website pointed out that the jobless are exhausting their unemployment benefits at a record pace.
Technical developments today:
USD crosses: reversal, reversal, reversal. The move is strong enough today for us to take significant notice and it is the highest close in the dollar index in 11 days. Particularly the likes of USDCAD have seen major damage to the bearish picture in the last couple of weeks. EURUSD still looks like correction mode only for the time being, but there is room for more correction - starting with the key 1.4450 area. We have to break down through there before we start talking about a complete refutation of the uptrend.
JPY crosses - a mixed bag. USDJPY stepped away from 90 with a rather convincing move higher, but other crosses . Has the JPY become the new, weak USD? Versus the broader market, these two currencies may go back to being relatively correlated in strength vs. especially the like of the commodity currencies, as was their wont some time ago. So while USDJPY may go up, AUDUSD might go down faster, meaning AUDJPY will fall as well if we continue the developments started over the last 48 hours.
Looking ahead:
Reasonably interesting data tomorrow, with Durable Goods Orders for Aug, New Home Sales for Aug. and the Final University of Michigan confidence number. The G20 in Pittsburgh also bears watching through tomorrow. More interesting still, as we mentioned this morning, is the end of the month approaching next Wednesday, which is also the end of a financial quarter of market activity that has caught many by surprise (so there may have been some bad decision making by those that were behind on their benchmarks)
Charts: EURUSD and USDCAD
EURUSD looks to be in correction mode for now after the climax rejection of the attempt above 1.4765, even if major trend markers are still in place. The reversal of the last couple of days could see us testing the 1.4450 support note how the 0.618 Fibo also comes in very close to this line - so this represents the first trend breaker level.
USDCAD: downside looks thoroughly exhausted for now in the bigger picture with this move higher. A glance over at the oil market double underlines that proposition. With this in mind, and as long as a bit or risk aversion comes in to support the USD, we could be looking at a test of the 1.1100+ major resistance in a hurry considering the current, very heavy market positioning.
Note that today's close comes in around the 55-day moving average.