The pronounced surge in crude oil prices surrounding President Trump's decision to pull out of the Iranian nuclear deal is softening as the US rig count rises, while USD is easing its charge versus EM and commodity dollars.
Article / 15 July 2010 at 14:52 GMT

JPY storms back on horrible US Empire Manufacturing survey

Head of FX Strategy / Saxo Bank

FX Update: JPY storms back on horrible US Empire Manufacturing survey

China June and Q1 growth data
The data out of China overnight was generally discouraging for risk and especially for Aussie, with virtually all of the figures disappointing, particularly the industrial production number. The July and August numbers may be particularly interesting as we see the expiration of Chinese tax rebates on exports of a wide range of commodities and industrial products today. This phenomenon is probably the reason behind the larger than expected US trade deficit in May and could also mean an even uglier number for June from the US trade data. But considering the recent rapid deceleration in US consumption, the end of these Chinese export rebates and the approaching end of the US inventory restocking boom in coming months, and we could actually see a remarkable improvement in the US trade balance ahead of the end of the year.

Euro continues to ride a wave of optimism (or is it just as much short squeezing) generated by the results of the Spanish 15-year government bond auction results that saw a very strong bid to cover ratio, even if the final yield came in above 5%. This combined with the recent Chinese interest in the Greek t-bill auction and the clear move to derail the Basel III process (which will ease pressure on Euro-banks for now) have really lit a fire under the single currency heading into today’s US session.

Trying to put a fundamental valuation on the Euro at its present levels is challenging, to say the least. Some might say that the move looks justified from the standpoint of spreads at the front end of the yield curve, even if we find this measure mostly irrelevant at current interest rate levels and taking into consideration that neither the ECB nor the Fed is going to be moving anytime in the near future. From the perspective of other measures like relative sovereign CDS prices compared to the US and CDS prices on European banks and evidence from money markets, etc., there seems to be more support for this rally. These factors will likely have to change for the Euro to find a ceiling vs. the greenback and the JPY. Perhaps the July 23 “results” of the bank stress tests will provide the next inflection point? Still, it is worth noting that despite all of the noise on the Spanish bond auction, some of the positive developments we have mentioned, and supposedly positive vibes on the Euro, that spreads on Spanish to German 10-year bond spreads have hardly budged for the last two weeks and remain at the higher end of the range above 200 bps today.

US Data
US data was a very mixed bag: the weekly initial jobless claims number was the lowest since exactly two years ago (“exactly” makes us a bit nervous, as this is a seasonally tricky time of year for claims, which are at new highs since January on a non-seasonally adjusted basis), but the Empire Manufacturing index, the first of the major regional manufacturing surveys, came in far lower than expected. Within the Empire survey, a few particularly worrying negatives that underline the risk of a rapid contraction in the inventory rebuilding cycle in the months ahead:

  • The “prices received” number was -1.59, the lowest since last December and a deflationary number.
  • The weakest employment component since February (at 7.94 vs. June’s 12.35 and May’s 22.37).
  • Perhaps worst of all, the “average work-week” component plummeted to an alarming -9.52 from 8.64 in June, suggesting rapidly decreasing labor utilization and/or less pressure to hire

This survey, the low PPI numbers and yesterday’s strong US treasury auction are what have jump started the US bond market again and have the JPY back on the warpath across the board, particularly against the USD and the iffy Aussie.

Looking ahead
Interesting to note that the Euro is performing very well here with the move back toward risk aversion  - or at least despite all of the bond buying and JPY strength after the US numbers. Is EURAUD ready for another explosive rally to the upside? And could EURUSD head higher if risk really heads south? It’s easy to imagine the EURAUD rally in a hard sell-off in risk, but tougher to judge EURUSD vs risk appetite here. It all depends on the strength of the negative view of the US vs. the market’s preference, which is clearly deteriorating the most rapidly in the last couple of months. Technically, there is more room for a squeeze to the psychological 1.30 level and even up to 1.3250 without really wiping out the longer term trend, even if we don’t like the pair at current levels.

We couldn’t be at a more interesting inflection point for risk in the equity market, with the S&P500 closing right around the 55-day moving average yesterday and posting a wonderfully “uncertain” doji/hanging man and we wonder if today’s plummeting JPY pairs are a tip off that the top for the pro-risk currency pairs in FX-land and possibly for risk in general are in for now.
Stay tuned. Watch out for the Philly Fed out shortly. Tomorrow we have the US CPI and Preliminary July University of Michigan confidence.
Stay careful out there.

Economic Data Highlights

  • New Zealand Jun. Business PMI out at 56.2 vs. 54.5 expected
  • Australia Jun. New Motor Vehicle Sales out at -1.2% MoM vs. -3.9% MoM in May.
  • China Q2 Real GDP out at 10.3% YoY vs. 10.5% expected and vs. 11.9% in Q1
  • China Jun. Purchasing Price Index rose 10.8% YoY vs. 11.6% expected and 12.2% in May
  • China Jun. Producer Price Index rose 6.4% YoY vs. 6.8% expected and 7.1% in May.
  • China Jun. Consumer Price Index rose 2.9% YoY vs. 3.3% expected and 3.1% in May
  • China Jun. Retail Sales out at 18.3% YoY vs. 18.8% expected and 18.7% in May.
  • China Jun. Industrial Production rose 13.7% YoY vs. 15.1% expected and 16.5% in May
  • Japan BoJ kept target unchanged at 0.10% as expected
  • Sweden Jun. Average House Prices out at 1.911M vs. 2.035M in May
  • Norway Jun. Trade Balance out at 25.4B vs. 26.5B in May
  • Canada May New Motor Vehicle Sales out at +0.2% MoM and +0.0% expected
  • Canada May Manufacturing Sales rose +0.4% MoM vs. +0.5% expected and +0.4% in Apr.
  • US Jun. Producer Price Index fell -0.5% MoM and +2.8% YoY vs. -0.1%/+3.1% expected, respectively and vs. +5.3% YoY in May.
  • US Jun. Producer Price Index ex Food and Energy out at +0.1% MoM and 1.1% YoY as expected.
  • US Weekly Initial Jobless Claims out at 429k vs. 445k expected and 458k last week
  • US Weekly Continuing Claims out at 4681k vs. 4447k expected and 4434k last week
  • US Jul. Empire Manufacturing out at 5.08 vs. 18.0 expected and 19.57 in June
  • US Jun. Industrial Production out at +0.1% MoM vs. -0.1% expected
  • US Jun. Capacity Utilization out at 74.1% as expected and vs. 74.1% in May

Upcoming Economic Calendar Highlights (all times GMT)

  • US Jul. Philadelphia Fed (1400)
  • New Zealand Q2 Consumer Prices (2245)
  • US Fed’s Lacker to Speak (2315)
  • Japan Jun. Nationwide Department Store Sales (0530)



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