CAD still on the defensive despite yesterday's very strong Retail Sales data.
MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:
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US Mar. Consumer Confidence out at 64.5 vs. 73.5 expected and 75.0 in Feb.
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US Jan. S%P/CaseShiller Home Price Index fell -10.7% vs. -10.5% expected and -9.0% in Dec.
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US Weekly ABC Consumer Confidence held steady at -31
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Japan Feb. Adjusted Merchandise Trade Balance out at ¥598.4 vs. ¥795.6 expected
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Japan Feb. Corporate Service Prices rose 0.7% YoY vs. 0.8% expected
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France Mar. Business Confidence Indicator out at 109 vs. 106 expected and 107 in Feb.
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France Feb. 3M YoY % Change in Housing Permits fell -12.7% vs. -19.1% in Jan.
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Germany Mar. IFO out at 104.8 vs. 103.5 expected and 104.1 in Feb.
THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):
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EU EuroZone Jan. Current Account (0900)
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UK BOE's King to speak on Inflation Report (0910)
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EU ECB's Trichet to speak before European Parliament (0930)
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EU Jan. Industrial New Orders (1000)
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US Feb. Durable Goods Orders (1230)
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US Feb. New Home Sales (1400)
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US Fed's Evans to Speak (1600)
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US Fed's Fisher to Speak (1730)
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New Zealand Feb. Trade Balance (2145)
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Australia RBA's Governor Stevens to speak (2210)
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Australia Jan. Conference Board Leading Index (2300)
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Japan Mar. Small Business Confidence (0500)
Market Comments
Yesterday's headline grabber was the 35-year low in Consumer Confidence expectations. If this, combined with the -10.7% year-on-year drop in home prices for Jan. isn't deeply recessionary data in an economy that is 70% based on private consumption, we'd like to know what is. The headline Consumer Confidence number was also far lower than expected - the worst number since the month of the beginning of the Iraq War 5 years ago, in fact. If we're to look for any positive spin in the confidence data, we can look at the weekly ABC numbers, which have bounced a bit from the trough seen 3 weeks ago, and as long as stock markets remain nominally stable, we might expect a bounce in the monthly number in April. The FX market largely shrugged its shoulders at the data yesterday.
The markets, FX and otherwise, have a tough time performing the tightrope act of following conflicting signals and themes here. The glass half full crowd talks up the recent glory of Helicopter Ben and the Fed's successful campaign to avoid credit derivatives armaggedon with the Bear Stearns hand-off to JPMorgan. Meanwhile, yesterday's horrible data has the glass-half-empty contigent pointing to the eroding "real data" fundamentals. Indeed, there are two focal points here - on the one hand we have the very immediate and pressing problem of saving the financial system from itself and keeping the big banks afloat. Stories related to this theme are the ad hoc events that push JPY crosses zanily back and forth from one day to the next and make the trading environment very difficult here.
But in the background, the gathering clouds of weakening fundamentals in the US present an ugly picture going forward, regardless of what is going on at XYZ bank's balance sheet. The consumer's balance sheet is what will count in the end, and the malaise will continue to spread as the effects of the financial meltdown filter down through the system. Also, while the market is celebrating the Fed's success in staving off the crisis du jour, please read the excellent opening page article in this morning's FT about how banks are only using the massive injections to shore up their own reserves and aren't extending this liquidity to each other nor to their clients.
What does all of this mean for FX? We still see the need for a big wash-out, capitulation, call it what you will. We will need to really see the whites of everyone's eyes before this megacycle draws to a close. What we have seen so far hasn't been enough to clean the slate. This will mean at least one more massive downward spike - possibly the biggest one yet - in JPY crosses and the commodity currencies, and an equity plunge to accompany it. The timing and the black swan trigger for this event is unknown, just as the Bear Stearns story seemed to come out of nowhere. The USD is likely to be a middle-of-the pack performer through this event, falling against the likes of JPY, but gaining heavily versus, for example, our favorite punching bag of the future - NZD. We'd like to see what happens if NZDUSD closes below its 55-day moving average. There may be fireworks down there.
Charts: USDCAD and NZDUSD
While the USD may remain on the defensive or at least rangebound versus the major currencies associated with risk aversion in the short/medium term, the "other dollars" are shaping up as the real potential weaklings if fears of a global growth slowdown persist. Here we have a look at USDCAD and NZDUSD
USDCAD - has risen back to the top of the range and survived a test of the 200-day moving average (in green) yesterday, an average that has been much in focus on previous rallies. As long as it stays above this 1.0130 area, we look for a follow-up rally. A close back below would be a short term disappointment. Adding to the potential for upside was the ability of the pair to maintain support yesterday despite a very strong Canadian retail sales number.
NZDUSD - as this publication is going to press, NZDUSD is rising well off its lows of the morning, but a clear line of support has developed at 0.7870 and at the 55-day SMA (in red) which has crept up above 0.7900 now. It would seem that fall and close through these levels, if it materializes, could see a significant follow-up move lower.
