USD finally takes a short breather in its rally

New highs for the USD this morning finally saw some profit taking on no particularly compelling catalyst save an orderly French bond auction and anticipation of the FOMC minutes.

The Euro pulled back from fresh lows below 1.2700, though not with overwhelming conviction. The catalyst may have been a solid French bond auction that saw all of the maximum targets reached and the French yield spread to Germany tightening again. Spain’s 10-year yield benchmark rushed to a new high at 6.50% but by this writing was back below yesterday’s highs and trading closer to 6.30%

GBPUSD swan dive on BoE report
Cable continued its cliff dive from yesterday, breaking well throught he 1.6000 pivot area and all the way below the 1.5900 level at one point today after the BoE released its quarterly inflation report, which didn’t offer particularly hawkish reading, particularly after CPI estimates were actually lower than at the February report, while in the interim, the market had gotten all worked up about the BoE’s mention of some degree of worry on inflation in the minutes from two meetings ago.

Chart: GBPUSD
Today’s action confirmed the whiplash impression GBPUSD has made over the last few weeks – rocketing to 1.630 from 1.5900, only to return to that lower figure today. On the technical side, this thoroughly confirmed that the pair is capped and looking to stay in the lower range, with the next key support test coming up at the 200-day moving average just above 1.5800. A break of that latter figure could open up for 1.5500.

Odds and ends
AUD: Note that BHP Billiton stock closed at a massive new low below recent support and at the lowest level since July 2009. As Australia has combined a mining bubble with a credit bubble and is falling headlong into a popping of both bubbles, we should all take note of the continued downside risks to the Australia currency, particularly given the large positions that likely built against the Euro and the USD in the previous cycle as EURAUD and AUDUSD were popular carry trades.

CAD: USDCAD managed to break well above its 200-day moving average today, but then retreated back to that now important support level (around 1.0060). The bears may be heartened by this, but given this market environment, and oil prices off 12-14 dollars, I’ve got a hard time considering a commodity currency, even if I prefer the CAD over the AUD. Still, the USDCAD pair is a tricky one to observe, as interest rate traders persist in keeping the 2-year rate at the high end of the range here (above 1.55%!) despite the recent tremors in risk appetite and the oil price collapse of late. There is a bit of cognitive dissonance going on there – but the market need the BoC to step off the hawkish rhetoric or to see all-out risk aversion for the USDCAD to slice decisively higher rather than merely chop higher with deep backfills.
JPY: The JPY took a back seat to the USD earlier today and was particularly weak as bonds finally saw their weakest day in a few weeks (intraday so far, at least, we should all appreciate how). USDJPY is now back in the daily cloud after trading mostly below it for the previous 7-8 days. To the upside, the pair is trading just within the weekly Ichimoku cloud, with the edge is in play just above 80.50, around the highs today so far.

FOMC Minutes preview
One wonders whether the FOMC minutes will be particularly interesting this evening, given that they are three weeks old and where the market was three weeks ago, but we should of course take note. The focus, as usual, will be on the degree to which hints are dropped by FOMC members (and whether they were dropped by “several members” or “ a few members” and other such silly considerations) on the likelihood of the need for new easing down the road if and when conditions warrant. Does the market still perhaps underappreciate the potential for the FOMC to want to remain very quiet and behind the scenes until after election day unless all-out panic is raging?

Looking ahead
This move has been brutal and may continue to be so, regardless of whether today’s bounce manages to last into the close or even if it blossoms over another day or two. Extreme uncertainty will remain until Greece’s election is out of the way and the new leadership there either declares a default/exit or some agreement is reached in which the terms of the agreement are made clear, almost regardless of what they are.

As a background note to what is going on – this kind of market is a classic “run on market themes”, in this case, what we are witnessing is a run on the predominant theme in many large macro portfolios out there , which has been to short all of the money printers against higher yielders and hard assets. The move may take some time to unwind, given the amount of time it remained in the trending “sweet spot”.

Stay very careful out there.

Economic Data Highlights

• UK Apr. Jobless Claim Change out at -13.7k vs. +5.0k expected and -5.4k in Mar.
• UK Mar. Average Weekly Earnings out at +0.6% 3M/YoY vs. +1.0% expected and +1.1% in Feb.
• Euro Zone Apr. CPI out at 0.5% MoM and +2.6% YoY as previously estimated and vs. +2.7% YoY in Mar.
• Euro Zone Apr. CPI Core out at 1.6% YoY vs. 1.5% expected and 1.6% in Mar.
• Switzerland May Credit Suisse ZEW Survey out at -4.0 vs. +2.1 in Apr.
• Euro Zone Mar. Trade Balance out at +4.3B vs. +3.8B expected and vs. +4.0B in Feb.
• Canada Mar. Manufacturing Sales out at +1.9% MoM vs. +0.4% expected
• US Apr. Housing Starts out at 717k vs. 685k expected and 699k in Mar.
• US Apr. Building Permits out at 715k vs. 730k expected and 769k in Mar.
• US Apr. Industrial Production out at +1.1% MoM vs. +0.6% expected
• US Apr. Capacity Utilization out at 79.2% vs. 79.0% expected and 78.4% in Mar.

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly DoE Crude Oil and Product Inventories (1430)
• US Fed’s Bullard to Speak (1630)
• US FOMC Minutes (1800)
• New Zealand Q1 Producer Prices (2245)
• Japan Q1 GDP (2350)
• New Zealand May Consumer Confidence (0100)
• Australia Feb. Average Weekly Wages (0130)