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John J Hardy
Eurozone and German PMIs both better than expected, data from France a little disappointing but overall it's good news for the Euro.
Article / 21 March 2012 at 14:42 GMT

USD perks up as bond onslaught eases

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

Long treasuries finally perked up today and the USD surprisingly responded more to this development than did the Japanese Yen. The BoE vote and February government spending numbers took the edge off the GBPUSD rally.

Bonds finally perked up today after the recent string of 9 daily closes in a row in which the US 10-year benchmark yield ended the day higher than the previous day. Risk appetite also eased back a bit after the enthusiastic start this morning from the news late yesterday that Portugal is supposedly making remarkable progress its reform efforts. The Portuguese 10-year yield has fallen this week by almost 150 basis points so far despite recent worries that it is the “next Greece”. Spanish yields headed in the opposite direction today, falling some five bps, especially interesting considering the action in major government bond markets elsewhere today, where yields were falling ahead of the US open.

The EURUSD rally petered out ahead of the two-week old high just below 1.3300 and reversed back below yesterday’s 1.3265 high water market, in the first sign that the range may hold here. There is more action in some of the crosses, however, as the likes of EURAUD and EURNZD are making a go at breaking out of ranges (judging from market positioning, shorts in these crosses were at record extremes just a few weeks ago).

GBP double whammy from BoE and budget breaking spending
The BoE minutes showed that two members (Posen and Miles) voted for additional asset purchase program spending of GBP 25 billion (essentially a “carry over” dissent from the previous meeting as they believed that the GBP 50 billion expansion announced then should have been GBP 75 billion). So net-net, this was not much of a market mover. More dramatic was the news that the public sector net borrowing for February (ex interventions), was far worse than expected at 15.2B vs. 8B expected. This raises the odds that the ratings agencies, having recently been out to review the outlook lower for UK debt, may actually move to downgrade in the months ahead. EURGBP failed to sustain a move higher on the day, though GBPUSD reversed back below the key 200-day moving average and an attempt at new local highs today – yet another sign that the USD would prefer not to give way just yet.

The Chancellor’s plans for the budget going forward are not the stuff of drama as the government looks to tinker with reducing some both taxes and spending in minor ways in the hope of boosting growth. The outlined measures are unlikely to shore up the credibility of UK finances any time soon.

Looking ahead
It’s a bit surprising that the JPY hasn’t received a bit more of a bid on today’s developments, as it feels like the weakening move has gone too far too fast, particularly today and for the likes of EURJPY, even if we are undergoing a sea change in the longer term outlook for the currency. We’ve got seven trading of the financial year in Japan remaining. Watch out for the latest Japanese trade numbers (for Feb.) tonight.

The Aussie remains on the weak side after the recent pronouncements from BHP that Chinese demand for key ores would flatten in the years ahead. The price for that stock is close to a multi-year low in Australia, which at least partially explains the AUDUSD divergence from the S&P 500, as the mining portion of and outlook for the Australian economy is far more important than the risk asset correlation. As we are writing this, AUDUSD is within shouting distance of the recent 1.0423 low and the 200-day moving average just below that. A move and close below these levels begins to trigger a more structurally negative view for the currency, particularly given its weakness elsewhere against the majors.

Chart: AUDUSD
After an initial probe toward the 200-day moving average was rejected last week, the pair is range of this key support area, a close below which could set up a fresh test of parity, which hasn’t been seen so far in 2012.AUDUSD

Tomorrow we have the flash PMI surveys for Europe that will give us the latest. Remember that oil prices are at record highs priced in Euros and that car sales have collapsed, though the expectations for the composite PMI for Europe is that it will creep back up towards 50 after already improving from last fall.

Economic Data Highlights

  • UK Public Sector Net Borrowing (ex Interventions) out at +15.2B vs. +8.0B expected and -7.9B in Jan.
  • US Weekly Mortgage Applications fell -7.4% vs. -2.4% last week
  • Canada Feb. Leading Indicators out at +0.6% as expected and vs. +0.4% in Jan.
  • US Feb. Existing Home Sales out at 4.59M vs. 4.61M expected and vs. 4.63M in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

  • New Zealand Q4 GDP (2145)
  • Australia RBA’s Debelle to Speak (2210)

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