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EURUSD hanging on to support by a thread so far

Fri, Nov 20 2009, 13:53 GMT
by John Hardy

Saxo Bank

Little news shaking the markets, as much of recent activity seems to be about position adjustments.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Oct. Credit Card Spending fell -0.4% YoY vs. -2.3% in Sep.

• Japan BoJ left target rate unchanged at 0.10% as expected

• Germany Oct. Producer Prices out at 0.0% MoM and -7.6% YoY vs. +0.1%/-7.5% expected, respectively

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• New Zealand Oct. Visitor Arrivals (Sun 2145)

• Australia New Motor Vehicle Sales (Mon 0030)

• Japan Oct. Supermarket Sales (0500)

Market Comments:

The move in risk aversion in the European session provided a big boost to the greenback, and EURUSD is pounding on the local support just above 1.4800 as we write this, and AUDUSD has collapsed through support and triggered a stop-fest now that the multi-touch trendline stretching back to March of this year has been broken. USDCAD. JPY was also stronger and JPY crosses, especially in the higher beta pairs, took a trip back to the south after a strong bounce late yesterday. Today's NZDJPY chart shows an interesting head and shoulders developing.

Chart: NZDJPY

New Zealand turned suddenly very vulnerable on the combination of the sell-off in risk and the OECD report encouraging the RBNZ to keep rates low due to a fragile economy. The combination has led to some impressive downside for NZDJPY, which now appears to be developing a rather large head and shoulders formation. It will be interesting to watch the behavior of the pair if the neckline is breached in coming weeks.

PBOC chief underlines weak yuan policy

In case we were in doubt about China's stance on the yuan, the PBOC governor Zhou said yesterday that China is "passive" on the value of the US dollar. It certainly appears that China is either in no rush at all to move on the yuan, or is using rhetoric as a smokescreen for actual plans to loosen up yuan policy in order to avoid overspeculation ahead of the fact (lower odds). Interestingly, in Bill Gross' latest commentary, he suggests that China is likely to change its yuan policy over the next 6 months. Does he know something we don't? In any case, Zhou's comments are likely helping to give EUR support outside of EURUSD and EURJPY becuase it suggests that the reserve diversification trade will not slow in coming months.

Negative yield on some US treasuries

An interesting article in the FT points out that some of the shortest term treasuries in the US are yielding less than zero percent as banks scramble to present the cleanest possible balance sheets by year end. Six-month bills dropped to a record low yield of 13 bps - lower than during the crisis last year. The article points out that all major US banks have a year end that coincides with the calendar year-end, whereas in years past, all of the big investment banks reported at the end of November. Nothing is more remarkable than the breaking records in low yields while the headline fret inflation and gold is trading at close to record highs. On that latter point, however, research is circulating that suggests that relative to the supply of money in existence, gold is still quite cheap - see Evan-Pritchards recent piece on gold over at the Telegraph for more on that subject.

Looking ahead: Whither the sell-off?

Looking at fundamental inputs into this move in risk aversion and USD rally, it appears that what we are seeing may just be an example of a market adjustment due to over-positioning. Risk inputs still suggest relatively benign conditions, even if they are less benign than in recent months. Still, the risk rally has been of such magnitude in currencies that we could see a considerable further adjustment lower in the riskier trades. If we try to connect the dots between the FT article and the action in bond markets and currencies, one might propose that some of this move is due to significant players taking their chips off the table well ahead of year end, hence the unwind.

Remember that next week contains the US Thanksgiving holiday on Thursday and Friday. Have a great weekend!

Published on  Fri, Nov 20 2009, 13:53 GMT