USD rally set to extend

It’s never easy for the bears, as the last couple of days of white knuckle downside yielded to a steep consolidation late yesterday and earlier today – but USD upside pressure may continue here.

The AUDUSD traded to 1.0250 overnight, but was already back above 1.0300 as of this writing (and then not as this post was in its later phases….) as the market decided to consolidate a bit after yesterday’s rout in pro-risk trades. And why not? Since early Jun, nearly every sell-off has been a one day affair that yields to a resumption of the rally – as the market’s hope is that central banks have simply outlawed any sustained rise in volatility and buying the dip is always the answer. This has worked for a while, but without new developments in the EU, we’re still stuck with a backdrop that is considerable cause for concern and I continue to look for a more sustained move in risk aversion and a market environment that isn’t just about the ever-falling Euro (in fact, as I have suggested, the single currency’s underperformance may ease if we see enough risk aversion and volatility developing to simply trigger across the board position unwinding as the Euro short positioning remains very large.

Economic Data
Fundamental news underlining the risk of continued worry on the economic outlook came today in the form of a weak batch of preliminary July PMI readings out of Europe (note the extremely weak Germany manufacturing PMI). Some tried to make good news out of the Flash HSBC Manufacturing PMI out of China, which came in just a hair below 50 at 49.5 after June’s weaker 48.2 reading. In the UK, there was a noteworthy further deceleration in the BBA Mortgages data, which plummeted all the way to 26.3k vs. 31.2k expected and 29.6k in May. There were only 8 monthly readings with lower activity during the 08/09 crisis.

Risk indicators
And looking across markets, one of the key risk appetite indicators I will watch with interest is the 55-day moving average for the S&P500 as a barometer on where the market stands. This moving average fell briefly earlier this month and the market didn’t hold below, but yesterday’s low was very close to this level (in the cash index at 1335). Meanwhile, the 200-day moving average is almost at a 4-year high and rising rapidly above 1300.

The likes of AUDUSD has only had eyes for risk appetite and has ignored other fundamentals that have eroded for the Aussie, so if we do get a tilt into a more bearish technical picture for risk, volatility could expand considerably and the pair may have some catching up to do to the downside. Recall as I have mentioned of late that broad FX volatility touched a new multi-year low last week. Given EU woes and the risks in the pipeline in the US from the political cycle and worrying signs in the US economy, volatility looks cheap indeed.

Other market signals are tough to read – gold and silver are in the doldrums – is that about uncertainty regarding the fate of QE, or over-positioning, or is it merely that the US broker scandals have scared a portion of the market away from trading?

Looking ahead
Look out for the latest Australian CPI data out overnight, which could continue to feed Aussie volatility. Tomorrow, we have the German IFO survey, which has been unbelievably slow to ease lower in light of what is going on in Europe. Is it finally time for a bit more of a downside acceleration there after the very weak June and July PMI data points? Watch for the UK Q2 GDP report set for release tomorrow, which is expected to show the third consecutive quarter of negative growth. The UK economic picture is getting very ugly again. Also up tomorrow is the RBNZ rate (very early Thursday in Europe). The only US data on tap tomorrow is New Home Sales before the more interesting Durable Goods Orders and Jobless Claims data set for Thursday.

Economic Data Highlights

• Germany Jul. Preliminary Manufacturing PMI out at 43.3 vs. 45.1 expected and 45.0 in Jun.
• Germany Jul. Preliminary Services PMI out at 49.7 vs. 50.0 expected and 49.9 in Jun.
• Euro Zone Jul. Preliminary Manufacturing PMI out at 44.1 vs. 45.2 expected and 45.1 in Jun.
• Euro Zone Jul. Preliminary Services PMI out at 47.6 vs. 47.1 expected and 47.1 in Jun.
• UK Jun. BBA Loans for House Purchase out at 26,269 vs. 31,200 expected and 29,567 in May
• Canada May Retail Sales out at +0.3% and +0.5% less Autos vs. +0.5%/+0.1% expected, respectively
• US Jul. Richmond Fed Manufacturing Index out at -17 vs. -1 expected and -3 in Jun.

Upcoming Economic Calendar Highlights (all times GMT)

• US Weekly API Crude Oil and Product Inventories (2030)
• New Zealand Jun. Trade Balance (2245)
• Japan Jun. Merchandise Trade Balance (2350)
• Australia Q2 Consumer Prices (0130)