Auto bailout package news on Friday boosts CAD again and keeps JPY rally attempt relatively contained for now, but for how long?


HEADLINES

  • New Zealand Q3 Current Account Balance out at -5.994B vs. -6.0B expected.

  • Japan Nov. Adjusted Merchandise Trade Balance out at -¥368B vs. -¥218B expected

  • Australia Nov. New Motor Vehicle Sales fell -17.8% YoY vs. -10.7% in Oct.

  • New Zealand Q4 Westpac Consumer Confidence fell to 101.3 vs. 104.8 in Oct.

  • China Q4 Wholesale Prices fell -0.4%

  • Japan Nov. Supermarket Sales rose 0.6% YoY

  • Germany Nov. Import Price Index out at -1.3% YoY vs. -0.2% expected


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • Sweden Dec. Consumer and Manufacturing Confidence (0815)

  • Sweden Nov. PPI (0830)

  • EuroZone Oct. Industrial New Orders (1000)

  • New Zealand Q3 GDP (2145)

Market Comment:

The EURUSD correction continued apace on Friday after EUR had clearly overreached itself on a broad basis. The correction lower in EURUSD cut almost 900 pips from the high on last Wednesday - the most remarkable move since, well, since a few days previously when the EUR rallied over 2000 pips from the lows just two weeks ago. This is truly remarkable stuff, and the reasons are twofold: First, Bernanke's declaration of war on deflation at the last FOMC meeting and promise of alternative and hyper-expansionary monetary policy, a subject we covered extensively last week; and second, the extremely thin holiday trading, where any existing market bias gets squeezed mercilessly into capitulation once a move develops. The bias in the market has probably been largely eliminated after the merciless rally and the subsequent huge drop from the top, so we may start the New Year with a clean slate.

President Bush's team extended emergency financing to the auto industry from the TARP package, even if it was with some heavy strings attached, including the need to do a radical restructuring to cut costs in a very tight timeframe. The move boosted CAD due to Canada's extensive export exposure to the US auto industry. Is this a good opportunity to buy USDCAD again on the reaction? Technically, it doesn't look very promising for the shortest term after reversing so strongly from Fridays' impressive highs, but if the pair is able to work its way back above 1.2300 again, the prospects for a rally would appear much brighter. Canada announced its own C$4 billion bailout package for Canadian subsidiaries of US automakers.

New stories abound on the planned Obama stimulus package, with the consensus figure of $800+ billion dollars being thrown around - that's around 5-6% of US GDP. The FT reports that Obama has raised the jobs target to 3 million jobs from 2.5 million jobs. Considering the rate at which Americans are losing their jobs in recent months, that seemingly aggressive target would only roll back about 5 weeks of job losses - and it is 4 weeks to Obama's inauguration and will take months and months for the style of stimulus package Obama is discussing to take hold in the job market. That means by the time any stimulus plan is getting traction, the US economy could have lost another 5 million jobs or more. The economy has to work through so much excess hedonism from the credit bubble that it will take a very long time indeed for the US to dig itself out of this mess.

Equity markets may hold the key to the next move in currencies. We've been locked in a range in the major US indices for some time now and we wonder how long the strain of optimism can hold up. Either way, equities are due for some directional resolution very soon, and our bias is for the downside, which could support the USD (confirming the "appropriateness" of Bernanke approach - also, EUR vs. USD rate spreads continue to plummet after ECB moves late last week) and the JPY. The greatest loser should be the EUR eventually. As we have outlined, the Euro economy will be devastated and deflation will reign supreme if the ECB continues to refuse to join the competitive devaluation theme. Also, the instability in Greece and suspected skeletons in European banks' closets are another.

This week offers a few data points of interest even as the Christmas holidays are soon upon us. For the US, we have the final Michigan confidence number and New and Existing Home Sales numbers tomorrow. On Wednesday, we have Durable Goods Orders and Weekly Jobless Claims, as well as Personal Consumption data and the PCE inflation measure for November and weekly jobless claims. Japan sees a raft of data releases on Friday, including inflation, Retail Trade and Household Spending numbers for November.

Beware the lack of liquidity in this market!