John J Hardy
The British pound has continued to strengthen this Tuesday as investors contemplate an interest rate hike sooner rather than later. GBPUSD is trading near cycle highs.
Article / 23 January 2013 at 10:30 GMT

Still doesn't pay to be fearful in this market

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank

Complacency reigns for now, as evidenced by AUDUSD snapping back higher yet again despite another negative data point. Also, GBPUSD avoids the abyss below 1.5800 for now after BoE’s King was out speaking last night.

BoE’s King / BoE minutes
The BoE’s King suggested in a speech late yesterday in Belfast that while the BoE stands ready to do more, the impetus for moving the economy forward must also come from government policy, and he particularly suggested that supply side efforts geared toward righting the current account deficit would be an avenue for doing this. This stance might be relatively hawkish for GBP in the short run (note GBPUSD emphatically surviving new lows this morning – looks like the 1.5800 level in GBPUSD is key. For resistance, it’s the 200-day moving average and then the psychological 1.6000 level.) But meanwhile, Carney has discussed the merits of nominal GDP targeting and abandoning the inflation target. Bloomberg Businessweek has a good article on this story.

The BoE minutes today showed the MPC voting 8-1 for the unchanged asset purchase target with the lone dissenter Miles again voting for more asset purchases. Fairly prominent mention was made of the strength in the pound, as it is clear that the MPC is very aware of the role that “currency wars” will play in staving off more economic weakness in the UK. This is part of my increasingly negative view on GBP versus the USD for the longer term.

Spain corruption – who cares?
There’s an unfolding government corruption story in Spain that has been breaking over the last couple of days that makes for rather interesting reading. There are reports of cutbacks being paid to Rajoy’s fellow PP members and the former party treasurer hiding €22 million in such payments in a Swiss bank account. Oh, my. This kind of thing could quickly take down a government. Note, MISH’s interesting coverage on this story and keep an eye on this story. For now, the market shrugs its shoulders and says who cares?

Australia CPI – again, who cares…
AUD was hit overnight briefly by a slightly weaker than expected CPI number, but recovered smartly again this morning. It’s proving impossible for the AUDUSD pair to sell-off lately, after being hit with a slew of relatively negative reports, as it is all about risk appetite with the Aussie, which isn’t going to sell off, it seems, when we have the VIX volatility index on US equities rushing to a new almost 6-year low (VIX last closed the week at these levels in early 2007). While on the note of volatility and complacency, note this ZH discussion of Goldman calling a new VIX regime. If this is true, at least for now, we could slip into a melt-up scenario I discussed last week. In any case, it would be nice for AUDUSD to finally rally above 1.0600 to see how it behaves up there.

Looking ahead
The JPY correction is entering its third day, but has so far failed to pick up any pace, suggesting that there are still JPY sellers out there for now, barring new developments (see above on AUD and complacency). Watch bond yields for a confirming indicator, as I would like to see them continuing to rise here in the near term if we are to prevent a larger scale correction in the JPY crosses than what we have seen so far.

Look out for the Bank of Canada meeting later today. Nothing seems to be built into the anticipation over this meeting, but we did see a little move back above 0.9900 in USDCAD. It would appear that CAD is lagging developments elsewhere, including a strong comeback in oil prices and a very risk willing market elsewhere. A continued unchanged to hawkish message from the BoC could see USDCAD reversing back through the 0.9885 area support, though that pair put us to sleep a long time ago – give me sub-0.9800 or above parity and we’ll talk USDCAD again. Until then, it’s deader than a doornail (though those with a long term view might note the low implieds in the options market.

Focus is going to quickly shift now to next week’s FOMC meeting.

Economic Data Highlights

  • Australia Q4 Consumer Prices out at +0.2% QoQ and +2.2% YoY vs. +0.4%/+2.4% expected, respectively and vs. +2.0% YoY in Q3.
  • Australia Q4 CPI (Trimmed Mean) out at +0.6% QoQ and +2.3% YoY vs. +0.7%/+2.4% expected, respectively and vs. +2.3% YoY in Q3.
  • UK Dec. Jobless Claims Change out at -12.1k vs. +0.5k expected and vs. -8.9k in Nov.
  • UK Nov. Average Weekly Earnings ex Bonus - 3M/YoY out at +1.4% vs. +1.5% expected and +1.7% in Oct.
  • Switzerland Jan. Credit Suisse ZEW survey out at -6.9 vs. -15.5 in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

  • Canada Dec. Teranet/National Bank Home Price Index (1400)
  • US Nov. House Price Index (1400)
  • Bank of Canada meeting (1500)
  • New Zealand Dec. Business PMI (2130)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • Japan Dec. Trade Balance (2350)
  • China Jan. HSBC Flash Manufacturing PMI (0145)
  • New Zealand Dec. Credit Card Spending (0200)



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