USD pushes back – more to come?

The market is still trying to make up its mind about whether yesterday provided the signal it wanted (that we should continue to celebrate the printing press). USD sell-off wavering and gold is waving a red flag.

The market continues to mull whether it got the signal it wanted yesterday – the expected Operation Twist did indeed materialize in the Fed’s statement, to the tune of a quarter of a trillion dollars or so through the end of this year, and Bernanke did everything possible to underline that Fed support would continue if conditions warranted, but the market had moved so much ahead of yesterday’s meeting that the operation twist was certainly priced in and then some, so further momentum is hard to come by at the moment. At the same time, the market isn’t exactly falling apart either, not yet anyway.

Two developments have been interesting today – first, USDJPY broke through the neckline of the upside down head and shoulders formation and pushed above the 80 level for the first time in about a month, an interesting move that has developed a lot of momentum over the last couple of days. The rally started yesterday off the 200-day moving average, just a couple of weeks after a break below that important technical level was rejected. Whether the USD can maintain itself above the psychologically important 80 level is vital.

Chart: USDJPY
Big break today is worthing noting, for technical reasons (rally launched off the 200-day moving average after a false earlier break) and because the upside down head and shoulders formation has given way. Note also the Ichimoku cloud, which has been at the high of the day thus far.

Second, the gold market has been the flipside of USDJPY, suggesting very much that the market isn’t getting particularly worked up on fears over the inflationary or USD-devaluation effects from the Fed’s latest monetary policy statement – one would certainly expect a strong gold market if this was a main macro theme.

Developments in European risk spreads were positive on the day, with the Spanish 10-year yield backing down to the 6.50% area, which was the original danger zone on the way up, and Italian yields are well back in the range as well as plans circulate for how Europe plans to address its debt woes. In Greece, the details are already emerging of the terms the new Greek coalition government will seek – effectively a 2-year extension on the plan to reduce the deficit to 2016 from 2014. An extension of unemployment benefits was also requested. Let’s wait and see the tone of the EU/Troika response.

US jobless claims data shows that the US job market continues to tread water or worse of late and a Canadian Retail Sales report rounded out a bad day for North American data, with the April less Autos number coming in at -0.3% month-on-month vs. +0.3% expected, albeit after a +0.2% upward revision to the previous month’s data.

Looking ahead
Overall, the developments on the day fit somewhat into the outline of the “crazy ideas department” I outlined yesterday, with the missing element being one of risk off, though we need to wait until the end of the week for a reading in that department. Tomorrow we finish the week in Europe with an IFO reading from Germany – an interesting sentiment measure in light of recent PMI declines and the massive deceleration in the ZEW survey.

Note also that the weak Chinese flash HSBC PMI overnight is a reminder that things are not well in the most important growth center for the world economy and the focus could swiftly switch back to the subject of weak economies and possibly corporate earnings (Q2 ending next week) even if the systemic risk trade fades.

Economic Data Highlights

• China Jun. HSBC Flash Manufacturing PMI out at 48.1 vs. 48.4 in May
• Switzerland May Trade Balance out at +2.48B vs. 1.26B in Apr.
• Germany Jun. Preliminary Manufacturing PMI out at 44.7 vs. 45.2 expected and 45.2 in May
• Germany Jun. Preliminary Services PMI out at 50.3 vs. 51.5 expected and 51.8 in Jay
• Euro Zone Jun. Preliminary Manufacturing PMI out at 44.8 as expected and vs. 45.1 in Jun.
• Euro Zone Jun. Preliminary Services PMI out at 46.8 vs. 46.4 expected and 46.7 in May
• UK May Retail Sales ex Auto Fuel out at +0.9% MoM and +3.0% YoY vs. +0.7%/+2.7% expected, respectively and vs. -0.3% YoY in April
• UK Jun. CBI Trends Total Orders out at -11 vs. -20 expected and -17 in May
• UK Jun. CBI Trends Selling Prices out at 2 vs. 12 in May
• Canada Apr. Retail Sales out at -0.5% MoM and -0.3% less Autos, vs. +0.2%/+0.3% expected, respectively
• US Weekly Initial Jobless Claims out at 387k vs. 383k expected and 389k last week
• US Weekly Continuing Claims out at 3299k vs. 3278k expected and 3299k last week
• US Weekly Bloomberg Consumer Comfort Survey out at -37.9 vs. -36.4 last week.

Upcoming Economic Calendar Highlights (all times GMT)

• Euro Zone Jun. Consumer Confidence (1400)
• US Jun. Philadelphia Fed (1400)
• US May Existing Home Sales (1400)
• US May Leading Indicators (1400)
• New Zealand May Credit Card Spending (0300)