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Article / 17 November 2009 at 13:45 GMT

USD refuses to give up the ghost.

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

USD fights back on Obama's urging China to consider yuan move. US core PPI shocks to the downside - USD bullish or bearish?

Lower yields continue to support the JPY. Critical EURJPY support nearing once again.

Economic Data Highlights

  • Japan Q3 Housing Loans rose 0.8% YoY vs. +0.4% in Q2
  • Switzerland Sep. Retail Sales fell -1.6% YoY vs. -1.0% in Aug.
  • Sweden Q3 Total Number of Employees fell -2.8% YoY vs. -1.9% in Q2
  • UK Oct. CPI rose +0.2% MoM and +1.5% YoY vs. +0.1/+1.4% expected, respectively
  • UK Oct. Core CPI rose +1.8% YoY as expected and vs. +1.7% in Sep.
  • UK Oct. RPI rose +0.3% MoM and fell -0.8% YoY vs. +0.1% /-1.0% expected, respectively
  • EuroZone Sep. Trade Balance was +6.8B vs. 2.2B in Aug.
  • US Oct. Producer Price Index out at +0.3% MoM and -1.9% YoY, vs. +0.5% and -1.8% expected, respectively
  • US Oct. PPI ex Food and Energy fell -0.6% MoM and rose +0.7% YoY, vs. +0.1%/+1.4% expected, respectively

Upcoming Economic Calendar Highlights

  • US Sep. Net Long-term TIC flows (1400)
  • US Sep. Total Net TIC Flows (1400)
  • US Oct. Industrial Production (1415)
  • US Oct. Capacity Utilization (1415)
  • US Fed's Lacker to Speak (1515)
  • US Fed's Pianalto to Speak (1730)
  • US Nov. NAHB Housing Market Index (1800)
  • US Treasury Secretary Geithner to Testify about G-20 (1930)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • US Weekly ABC Consumer Confidence (2200)
  • Australia Q3 Wage Cost Index (0030)

Chart: AUDUSD, again, again
AUDUSD has teased with the prospect of a turnaround on a couple of occasions lately, and we wonder if today's move is just another of these teases that eventually yields to another leg up or whether we are looking at a genuine turnaround and larger consolidation for the pair. The latter scenario is preferred as long as we close below this week's pivot just below 0.9300 and is enhanced with a close through the recent low at 0.9210 in coming sessions. The monster trendline further below lies in wait as the next step. The relatively dovish RBA minutes overnight have brought the interest rate spreads tighter vs. the USD and suggest that new highs in AUDUSD aren't warranted here. Note the divergence in the momentum for the daily stochastics as well.

 

Market Comments
The USD and JPY have swept stronger against the market in today's European session. And for once, the USD move has come unaided by a concomitant move in equities to the downside. This is an interesting divergence, to say the least. We wonder if yesterday's decisive move lower in yields, which took the US 2-year, for example, into new territory is serving as a game-changer across markets. After all, if bond buyers are willing to chase these pathetic yields, it strongly suggests more perceived weakness ahead than rallying asset prices would otherwise suggest. Of course, as we have said ad nauseam of late, the rally in asset prices is a side effect of the "liquidity is king" theme that has been playing for some time now. Alternatively, the USD bears might tell us that the USD move was just a bit of position adjustment triggered by Obama calling for China to allow the yuan to appreciate (President Hu, for his part, didn't even acknowledge what Obama said about currency appreciation...), as the consensus is that a Chinese move on the yuan will be largely bullish for the USD relative to the Euro. We prefer to prick up our ears here and listen very closely to the market's pulse, since this move looks interesting. The slavish correlation of the USD with risk appetite has been the be all and end all of currency market moves of late, so any divergence is certainly worth noting.

The moves in JPY crosses have followed the simple logic of compressed interest rate spreads, and EURJPY is now less than a figure from the pivotal 200-day moving average just below 132.00. A close below that level could get something interesting started across the board for non-USD JPY crosses (non-USD since USD and JPY strength tend to be more or less positively correlated) USDJPY has actually bounced a bit on the overall USD strength.

Technically speaking
The USD managed to cross to the strong side of the weekly pivot in AUDUSD (0.9297), USDCAD (1.0568), EURUSD (1.4925) and USDCHF (1.0120), all of which are levels worth watching intraday. A sharp move back through these levels suggests we're just seeing some churning in the range for now. The argument that this isn't just a sharp move within the range is enhanced if we get a close through 1.4820 in EURUSD in the sessions ahead, and for example, below 0.9210 in AUDUSD.

Inflation data
Today's UK inflation data was slightly higher than expected, but not enough to serve as a catalyst. US PPI data served up a rather shocking -0.6% drop for the core ex Food and Energy index on month-on-month comparisons and a mere +0.7% YoY, which is the lowest reading since the core PPI dipped sharply in 2002- 03. This is not necessarily a USD-negative development if the idea rubs off that low US inflation could mean lower inflation elsewhere and that too much tightening is priced into the market for other central banks.

Looking ahead
The Industrial Production and Capacity Utilization data out in a bit are a likely to show continued activity pick-up in the US manufacturing sector, which is in the midst of an inventory rebuilding cycle. Tomorrow, GBP is in focus again with the Bank of England minutes. EURGBP is having a try through its 200-day moving average today. GBP seems to be enjoying the low rates environment here much as the JPY is, and the market will be looking for more clues concerning the MPC's feelings about any further quantitative easing moves. Also up tomorrow we have Canadian and US CPI data. Oil prices refuse to break out of the rather high range of late, and the eventual implications for year-on-year inflation comparisons are obvious, since oil was trading below 40 dollars around the beginning of the year. Clearly, after yesterday's Bernanke rhetoric, however, the Fed sees little to worry about on the inflation front.

 

AUDUSD

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