The Fed’s supposed unofficial mouthpiece (one of notably poor quality of late), the WSJ’s Hilsenrath, was out with a two pieces yesterday, the first discussing a Capital Economics idea that the Fed might be looking at a “funding for lending” scheme meant to help borrowers that are hungry for loans to buy real estate, hoping that this would help to increase the contribution of housing to the economy and raise home prices and make other home-owners feel better about the equity in their own homes and thus increase consumption. The second piece was on the idea of an “open ended QE” that known Boston Fed dove Rosengren (non-voter) is in favour of – a few steps below the Nominal GDP targeting plan that the super-dove Evans promoted shortly before he lost his vote on the FOMC. Let’s keep track of what the Jackson Hole Fed conference brings us and we should all wonder whether the Fed is going to be in a rush to act when the S&P 500 trading close to 1400 rather than 1200 or even 1000.
A few developments worth noting
EUR: I noted the EURGBP situation this morning, suggesting that we were at a pivot point that would either open the way to a move considerably higher in the coming days or serve as important resistance. Events all conspired in favour of the latter development, as Euro periphery spreads we back a bit higher today, risk appetite suddenly crumbled (tends to be more GBP supportive) and after the BoE inflation report (see more below). EURUSD is still in very short term limbo, as it has been unable to take out the 1.2400/50 area resistance (the 55-day moving average is in there at 1.2414 or so as well).
GBP: firmed up despite recently ugly developments on the dip in risk appetite today and as the BoE sounded less dovish than one might expect in today’s quarterly inflation report, given its history and the parlous current state of the UK economy. The BoE’s King argued against further rate cuts, saying they might be counterproductive, and suggested that the anticipated CPI levels didn’t argue for the urgent need of stimulus. King also said that the state of the economy might be slightly better than the rather poor data suggest, even if he made it clear that asset purchases would still be pursued when warranted and that the EU crisis continues to generate considerable uncertainty.
AUD has been interesting over the last couple of days. The RBA meeting yesterday failed to serve as much of a catalyst in terms of yield expectations, but the Aussie has shown significant weakness against the Euro and versus CAD over the last couple of trading sessions, and the near term pivotal 1.0580 resistance in AUDUSD has held after a couple of probes above that level, challenging the potential for a full descending trendline test that would have taken the pair to 1.0700. Or is it just a bit of profit taking ahead of tonight’s employment report after a terrible June employment report? As long as 1.0600 area holds now as resistance, the focus could be on whether 1.0450 can hold here to the downside, which in turn is, as usual, up to the market’s level of complacency on risk.
Chart: AUDUSD Levels galore in AUDUSD – the last attempts through 1.0580 have failed, so we have the 1.0580/1.0600 area as resistance blocking the way to 1.0700 and to the downside, the 1.0450 is the first level of note.
CAD: parity has fallen again in USDCAD, but the pair has been one of the most non-trending ones in recent years – at least in terms of the size of the swings – a break of a significant level requires market participants to take a stand one way or another sometimes, so watch carefully in coming days for whether the pair can get comfortable down here. It’s worth noting that we have Canada’s employment report up on Friday.
JPY implied volatility has descended recently to its lowest levels in a long time, approximately matching the lowest levels we have seen in many of the JPY crosses in the post global financial crisis environment. If we look at the most recent two occasions when JPY volatility was at these levels – in late April of this year and in January, we must note the tremendous JPY moves that followed after these two occasions – in the case of EURJPY, about 1000 pips down from late April levels over the ensuing weeks and from the January low in implieds, about a 1000 pip rally. There’s no way of knowing, of course, if JPY vols will head lower still, but it does suggest marked complacency. As for AUDJPY, risk reversals show that Aussie downside volatility against the JPY is its cheapest relative to upside volatility since 2007.
Bonds made an interesting comeback today, which is in-line with the generally risk off move that was across the board today, though that move merely looks like a minor consolidation after a heady rush higher in risk appetite on the other side of last week’s ECB meeting and US data. The rest of this week is all about the market trying to see if it can get comfortable up here or if we have all gotten far too complacent . I lean toward the latter eventually, with the uncertainty one of timing.
We’ve got quite a lot going on in the Asian session tonight – with Australia’s latest employment report to be closely watched. We also have Chinese July CPI and other data and a BoJ meeting, so please note the comments on JPY volatility above. As for China’s CPI, weren’t food prices meant to have a large weight in the Chinese inflation calculation? Odd to see expectations so low there considering the massive runup in grain prices in July. Higher inflation would likely make the PBOC more cautious on easing.
Economic Data Highlights
- Germany Jun. Trade Balance out at +17.9B vs. +14.6B expected and +15.6B in May
- Germany Jun. Industrial Production fell -0.9% MoM and -0.3% YoY vs. -0.8%/+0.3% expected, respectively
- US Q2 Nonfarm Productivity rose +1.6% QoQ vs. +1.4% expected and -0.5% in Q1
- US Q2 Unit Labor Costs rose +1.7% Annualized vs. +0.5% expected and vs. +5.6% in Q1
Upcoming Economic Calendar Highlights (all times GMT)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- New Zealand Q2 Unemployment Rate/ Employment Change (2245) New Zealand Jul. QV House Prices (0000)
- New Zealand Aug. ANZ Consumer Confidence (0100)
- China Jul. CPI (0130)
- China Jul. PPI (0130)
- Australia Jul. Unemployment Rate/ Employment Change (0130)
- Japan Jul. Consumer Confidence (0500)
- China Jul. Industrial Production (0530)
- China Jul. Retail Sales (0530)