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CAD suffering the most at the moment

Fri, Jun 12 2009, 13:23 GMT
by John Hardy

Saxo Bank

Yet another bull/bear tug of war in equities yesterday as risk appetite seems to be at a fulcrum. Will USD benefit on swoon in confidence?

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Apr. Retail Sales rose +0.5% MoM vs. +0.2% expected, but fell -0.1% ex Autos vs. +0.4% expected

• China May Retail Sales grew 15.2% YoY vs. 15.0% expected and 14.8% in Apr.

• China May Industrial Production rose 8.9% YoY in May vs. 7.7% expected

• Japan May Consumer Confidence rose to 36.3 vs. 34.0 expected and 33.2 in Apr.

• EuroZone Apr. Industrial Production fell -21.6% YoY vs. -19.8% expected

• US May Import Price Index rose + 1.3% MoM vs. 1.4% expected and fell - 17.6% YoY vs. -17.5% expected

THEMES TO WATCH – UPCOMING SESSION

• US Jun. preliminary University of Michigan Confidence (1400)

• US Treasury Secretary Geithner to Speak at G-8 News Conference (Sat 1330)

• New Zealand Apr. Performance of Services Index (Sun 2230)

• New Zealand Q1 Manufacturing Activity (Sun 2245)

Market Comment:

More verbal intervention out of Asia overnight as Japan's FinMin Yosano described Japan's confidence in US debt as "unshakable". But confidence in US debt was already evident yesterday with strong results from the latest treasury auction - this time the longest term 30-year US T-bonds. Strangely, the USD didn't react at all to the auction results, instead seeming to follow the ebb and flow in equity prices and then following through stronger in the European session today. There seem to be growing signs of an exhaustion in the weak USD move here, though we have yet to breach significant technical levels. The last four daily bars have seen strong moves in the opposite direction of the previous day's action.

Chinese data overnight seems to confirm the idea that the Chinese consumer is consuming and that industrial production is recovering, though anecdotal evidence suggests troubling trends and questions the strength of the recovery. The NY Times article about Chinese commodity buying yesterday noticed that lower grades of steel were being consumed in very large quantities as these are the types of metal associated with road building, etc., while higher grades associated with consumer products were seeing less demand.

The G-8 summit this weekend is unlikely to produce much of note for the FX market. There has been a reasonable noise level of late on the idea of reserve diversification into so-called IMF SDR's, but this kind of thing moves slower than molasses and the level of verbal intervention out of Asia would suggest that China and others won't want to be too loud about any diversification plans as this would be tantamount to a shooting themselves in the foot. Rather, the focus of the G-8 most relevant for currencies is the discussion of "exit strategies", led, of course, by the German ueber-hawks, who, despite panic, worse-than-the-Great-Depression contractions in their export-related industries are worried about how the worlds' central banks are going to withdraw liquidity and extract itself from the programs that were enacted to prevent a complete meltdown of the financial system and economy.

It appears the USD strengthening today has a bit more conviction, and this is certainly supported in the comeback by US T-bonds yesterday and the correction in commodities - especially oil - today. Gold is also scratching to local new lows today, certainly confounding the old theme that no currencies are to be trusted.
With six virtually unchanged days on the US equity indices having completely taken the momentum out of the shorter term bull move there, are we set up for a nasty correction now? The lack of any sizeable correction all the way up in risk appetite actually makes the risk for an ugly correction higher in our view. Look out for a dramatic volatility expansion if risk aversion develops here. ( See the AUDJPY chart below for the classic technical pattern that develops in these kinds of situations.)

Charts: EURUSD and AUDJPY

EURUSD - developing head and shoulders?

The technicals for the EURUSD chart are more than interesting if this sell-off deepens toward the 1.3800 area, which would complete the neckline for a rather compelling head and shoulders pattern. But already today we also have a key support area in the form of the 21-day moving average close to the day's lows around 1.3955.
Further south, the key 1.3720 area support looms. A break there could see follow through all the way to the 200-day moving average down below 1.3400.

AUDJPY

AUDJPY is in a classic ascending wedge formation. The outlook for such a formation when it breaks is usually for a very high momentum downdraft. It is interesting to note that the latest move to new highs for the week yesterday is not holding well as of this writing. Could we see a big follow through lower if risk aversion is on the rise here again? AUDJPY should be a good proxy for risk appetite in the coming days in any case.

Published on  Fri, Jun 12 2009, 13:30 GMT