07 September 2010 at 21:04 GMT
The Euro continued sliding all day, while the low yielding USD, GBP and JPY troika were at the top of the G-10 heap today on risk aversion. USDCAD poised at key levels ahead of tomorrow's BoC rate decision.
Remember fixed income?
Today's US auction of 3-year notes saw strong demand with a slightly lower yield than expected. Indirect bidders (includes foreign central banks) bid the most since June. In general, US yields are sharply lower from their highs late last week. The 30-year, for example, topped out last Friday above 3.85% but was yielding below 3.70% today late in the US session. Tomorrow we have the 10-year auction and Thursday a 30-year auction. Looks like yields could be headed lower again - a development that could further confirm the renewed advance of the Japanese Yen. The 30-year bond yield is especially interesting because of the recent action that took yields below 3.85% for the first time since the height of the panic deleverag in late 2008. Yields then backed up to that resistance level until Friday saw a test of that level ahead of today's strong new demand for treasuries.
Chart: USDJPY
USDJPY has hit a new 15-year low today. Considering the inflation rate differentials in the interim, the equivalent level today of 1995's USDJPY rate of 80 is far, far below that level. As long as US/Japanese rate spread compression renews and continues at the long end of the curve and as long as the market remains complacent on Japanese sovereign debt risks, and as long as the BoJ/MoF remain sidelined on intervention, then the USDJPY has the support from fundamentals to grind ever lower here in the near term. Sentiment (extremely lopsided position) is the only big red flag at present on this trade.
Gearing up for the US mid-terms
The Obama stimulus and tax cut plan revealed yesterday is an interesting political ploy ahead of the election. It tries to give the Democrats some credibility on the tax cut front to pre-empt the Republicans as the Democrats hope that the new firebrand Tea Party candidates heading into November 2 will prove too radical for the large number of moderates among voters. The Wall Street Journal print edition today published a large spread giving an overlook of the House of Representatives races on election day. Currently, the House is comprised of 255 Democrats and 178 Republicans and the article estimates that about 179 Democratic seats are safe and about 175 Republican seats are safe. That leaves 81 seats "in play" of which it appears that some 45 are a true toss-up - so the least sway that either party can create heading into election day will be the different between a majority or minority in the House.
The question is to what degree the election outcome is affecting expectations in the markets. The very obvious story is one of the Republican party's momentum, but a clear cut and large Republican victory with a new majority in the House would ensure gridlock until at least 2012 unless, as one writer suggested was a possibility, Obama "pulls a Clinton" and is able to work with the Republican majority on new legislation. A retention of the Democratic majority gives more room for policy action, though the Democrats' ranks seem increasingly divided, with the return of the Blue Dog Democrat (fiscally conservative Democrats) gaining much notice.
Euro unglued
The Euro remained weak through the US session as well today and today's action completely erases the majority of last week's gains for EURUSD and saw the pair closing right on the 55-day moving average on the close. EURGBP swooned as well, and we have long commented on the pound's tendency to mimic the greenback.
Chart: EURUSD
EURUSD closing the day right on the 55-day moving average as the PIGS issue is rearing its ugly head once again in Europe. This moving average has been much in focus of late and a break might lead to significant additional follow-through. It would be easier to make a more outright bearish case on the Euro if the data in the region was weaker - though we did see an ugly Jul. German Factory orders number in the European session. More of that kind of data will be needed to get a full test lower for EURUSD.
Looking ahead
It seems untenable for the like of AUD and NZD to remain as elevated as they are at present considering the swooning Euro and ugly reversal in risk sentiment today - but interest rate spreads, copper prices, and Chinese equities are telling us that everything is ay-okay with Aussie, so we'd need to see something new out of Asia and/or Aussie rates to put the worry back in the long AUD trade (long time readers know of our low view of the Aussie's medium-term prospects.)
Note the USDCAD close right at resistance ahead of tomorrow's key event risks - sets up an interesting day tomorrow with the Ivey PMI and Bank of Canada (big disagreement on whether the bank hikes another 25 bps).