Risk aversion trade finally kicks in again as JPY crosses swoon - is it for real this time? BOE also on tap.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Consumer Credit rose to $15.3B vs. $6.0B expected

  • New Zealand Q1 Unemployment Rate rose to 3.6% vs. 3.5% expected and 3.4% in Q4

  • UK Apr. NIESR GDP Estimate out at 0.4%

  • Australia Apr. Employment Change out at 25.4k vs. 10.0k expected

  • Australia Apr. Unemployment Rate Ticked up to 4.2% vs. 4.1% expected and 4.1% previously


THEMES TO WATCH – UPCOMING SESSION

Key Risk Events (All times in GMT)

  • Germany Mar. Trade Balance (0600)

  • Sweden Mar. Industrial Production and Orders (0730)

  • Germany Mar. Industrial Production (1000)

  • UK Bank of England to Announce Rates (1100)

  • EuroZone ECB to Announce Rates (1145)

  • EuroZone ECB's Trichet to Hold Press Conference (1230)

  • US Weekly Initial Jobless Claims (1230)

  • Australia RBA Quarterly Monetary Policy Statement (0130)

Market Comments

Yesterday, markets finally took a breather from the recent rally in risk appetite as a further extension of the crude rally weighed on stocks. Perhaps more important for equity markets was the announcement that the SEC would require investment banks to publicly disclose their funding levels after the second quarter. The market developments saw JPY and CHF finally gaining a strong toehold and their antipodes the NZD and AUD took a beating. Are we finally read for a bigger unwind in risk appetite here? It seems every time NZDUSD looks like it is ready to take its dive, something pulls it back from the brink. Eventually we would expect a follow-through move lower, just as JPY crosses would seem to have more downside than upside potential at these levels. EURCHF teased us with a brief few days above the 200-day moving average, but now finds itself back below. Short EURCHF trades are worth consideration! Or if you like getting exotic - give short NZDCHF a thought...

Much attention given overnight to an FT article saying that "Europe and US unite on stronger dollar". The article cites "senior officials" from both the US and Europe expressing a desire to see the USD stronger, and both sets of officials pointed to the April G-7 communique and its significance. Still, the article reveals little about real action from either side of the pond, and the reaction to it says more about the situation (and growing anticipation of further USD strength) more than shedding light on any strong new policy response to market conditions. Real coordinated action likely only comes in if we see EURUSD well above 1.6000 again.

The negative data from the EuroZone yesterday trumped the recent strength in oil prices (consensus calling stronger oil prices USD bearish) and EURUSD sold off sharply on the day, with a follow-up move overnight. Now it is up to the ECB and Trichet's press conference today to either accelerate this move or turn it back. While we always respect Mr. Trichet's potential hawkishness - he has surprised the market so many times in the past, having previously eliminated all expectations for short to medium term easing from the ECB - we wonder if it is finally time for him to begin sounding more marked caution on the growth front.

So which way EURUSD? EURUSD technicals show the pair finding resistance at the 55-day Moving Average lately and now we have the recent low at 1.5360 as first resistance. Cyclically, EURUSD needs to smash all the way down through 1.5000 before we can start talking about damage to the secular bull trend. A more dovish Trichet is very likely to see the pair probing below the lows this morning, but a bigger directional call is tough at these levels considering the conflicting short term bearish picture while the longer term bull trend still intact.

The Bank of England is expected to keep rates unchanged today. The market has priced in low odds for a cut. We lean towards market expectations for no move by the BOE. Even with the data from the UK showing continued signs of deterioration, the BOE is trying to shore up credit markets via various non-traditional operations modeled lightly on the Fed efforts to provide liquidity in mortgage markets. Also recall that two members voted last time around to keep rates unchanged. EURGBP may stay under pressure as long as the BOE doesn't move. Watch the 55-day moving average in this pair - now trading just above 0.7825. It dove below that average on Friday, only to close just above it again. A close below would be the first close below this average since August of last year and could open up for a sub-0.7700 attempt. EURGBP is likely to follow EURUSD direction

Be careful out there today - seems like we have potential for plenty of market energy.