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John J Hardy
What next for the US dollar after Janet Yellen's comments on Tuesday led to a weakening of major dollar pairs? Saxo's John Hardy explains.
Article / 08 February 2013 at 9:11 GMT

Euro nervous after ECB meeting. CAD at key pivot.

Head of FX Strategy / Saxo Bank
Denmark

Euro trades nervously after yesterday’s sell-off on the Draghi press conference. USDCAD is at an interesting pivot point after yesterday’s reversal and ahead of key data from Canada later today.

Draghi’s relatively dovish performance yesterday (see my post-meeting note) has bunds and fixed income back on the bid, and this has EURJPY steeply correcting ahead of the weekend, finally breaking (unless we get a huge reversal later today…) the weekly pattern that has been in effect virtually every week of this year, in which the JPY was strong early in the week and then weakened sharply ahead of the weekend. As I indicated yesterday, the last phase of the Euro strengthening and yen weakening outran developments in EU bond spreads and government bond yield spreads globally, respectively, so the near term correction potential on a continued rally in bunds and with no improvement in EU peripheral sovereign spreads is considerable – several hundred pips.

China’s trade numbers appear to show an explosion of trade activity, but the usual seasonal effects must be taken into consideration at this time of the year, as last year’s New Year holiday fell very early in late January, while the year of the Snake doesn’t start until this Sunday. Chinese markets will be closed for all of next week. That being the case, I’m looking for the AUDUSD consolidation back higher after yesterday sub 1.0300 low to run out of steam somewhere between here (at 1.0320 as I write) and the key resistance zone of 1.0340/80. Still, if we run up to new all-time highs in US equities, the pair may not break down just yet – the bigger key here besides the 200-day moving average at around 1.0310 (two breaks last fall with no follow through) is the 1.0150/60 range support.

Carney and GBP
Carney’s testimony before a parliamentary committee yesterday was extremely cautious, as he both downplayed the desirability of NGDPLT while at the same time saying that it might be appropriate for the UK’s situation. It will be interesting to watch if the Canadian private debt bubble debacle breaks before Carney leaves his Bank of Canada post. The only takeaway appeared to be that Carney would likely tolerate uncomfortably high inflation if the economy was very weak. Any GBP upside at the moment would appear to be more about EURGBP unwinding rather than any dramatic developments related to the BoE statement yesterday (mildly dovish, but some were already expecting further asset purchase now) or Carney’s testimony. For the next days, it Is about trying to find a re-entry point for GBPUSD downside.

Chart: USDCAD
USDCAD is interesting after yesterday’s reversal on an extremely ugly building permits number showing a second month in a row of sharp contraction in permits. This is adding to the story that Canada’s housing bubble – 60% price appreciation just since 2005 – may be about to reverse course. Remember that the Fed had 500 basis points of easing to administer to the economy even before it started QE when the US housing bubble struck. Canada would start a post-housing bubble environment with only 100 basis points to ZIRP. In any case, technically this is an interesting pivot area for USDCAD. The recent run-up to 1.0100 looks like it has reversed after the 1.0060 area fell again on the way back down, followed by the 200-day moving average just below parity. But the downside momentum failed to pick up and now we have a one-day bullish candle reversal pattern. The next day or two will likely tell us whether the rally is back on or if we have to dip back lower into the old range again. I am certainly looking higher for the longer term, but let’s see what happens here tactically. A close back above 1.0060 is the first major bullish confirmation, though testing the long side already here looks cheap as the point of falsification (below yesterday’s low) is so close. Stay tuned and look out for Canada’s employment report and housing starts data today, which could provide the spark for the next directional move from here in CAD.

usdcad

Looking ahead
Next week we have a BoJ meeting on tap for Thursday. After the recent huge change in the Bank of Japan’s policy statement at its last meeting, and with Shirakawa volunteering to step down early (mid-March), and with the G20 approaching late next week as well, it’s hardly time for anything new from the BoJ.

For now, I continue to watch the bond markets for whether the rally takes us back into the old range and watch the US equity market, to see if these attempts at all-time highs in the Dow Jones industrials are frustrated or lead to another leg up in risk appetite as retail investors appear to be swarming into equities again.

The US Calendar is quiet today (if you didn’t read the section on USDCAD above, please note key Canadian figures today)

Economic Data Highlights

  • Japan Dec. Adjusted Current Account Total out at ¥98.1B vs. ¥230.8B expected and ¥225.9B in Nov.
  • China Jan. Trade Balance out at +$29.15B vs. $24.70B expected and $31.62B in Dec.
  • China Jan. CPI out at +2.0% YoY as expected
  • China Jan. PPI out at -1.6% YoY as expected
  • Switzerland Jan. Unemployment Rate out unchanged at 3.1% as expected
  • Germany Dec. Trade Balance out at +12.0B vs. +15.0B expected and +16.9B in Nov.
  • Sweden Dec. Industrial Production out at +1.3% MoM and -2.2% YoY vs. +0.2%/-3.8% expected, respectively and vs. -5.0% YoY in Nov.
  • Sweden Dec. Industrial Orders out at +7.7% MoM and -2.8% YoY vs. -3.2% YoY in Nov.


Upcoming Economic Calendar Highlights (all times GMT)

  • Canada Jan. Housing Starts (1315)
  • Canada Dec. International Merchandise Trade (1330)
  • Canada Jan. Unemployment Rate and Employment Change (1330)
  • US Dec. Wholesale Inventories (1500)
  • UK BoE’s Haldane to Speak (1630)
  • New Zealand Jan. QV House Prices (Sun 2300)
  • Australia Dec. Home Loans (Mon 0030)

 

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