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JPY volatility goes haywire on China rumors and US bond strength.

Thu, Jul 9 2009, 14:17 GMT
by Saxo Bank Strategy Team

Saxo Bank

USD not cooperating with risk appetite correlation: interesting or simply a symptom of summer doldrums?

MAJOR HEADLINES – PREVIOUS SESSION

• Australia Jun. Employment Change fell -21.4K vs. -20.0k expected and -8.5k in May 
  
  
• Australia Jun. Unemployment Rate rose to 5.8% vs. 5.9% expected and 5.7% in May
   
• Germany May Trade Balance out at 9.6B vs. 9.0B expected and 9.4B in Apr. 

• Japan Jun. Machine Tool Orders out at -73.1% YoY vs. -79.2% in May 

• Sweden Jun. CPI out at +0.2% MoM as expected 

• UK May Visible Trade Balance out at -£6263M vs. -£6750 expected 

• UK Bank of England leaves rates unchanged at 0.50% as expected 

• Canada Jun. Housing Starts out at 140.7k vs. 130k expected and 130.3k in May 

• US Weekly Initial Jobless Claims out at 565k vs. 603k expected and 617k last week 

• US Weekly Continuing Claims out at 6883k vs. 6710k expected and 6724k last week 

THEMES TO WATCH – UPCOMING SESSION

• US Jun. ICSC Chain Store Sales (1500) 
  
  
• US Fed's Kohn to Testify (1730) 
  
  
• Japan Jun. Domestic CGPI (2350)

Market Comments:

The action yesterday was all about the Japanese Yen, as extensions in the moves of JPY-supportive background factors (weak commodities, equities and strong bonds) and a couple of specific news items conspired to create a dam break. EURJPY was down to an astounding 127.00 - all the way below its 200-day moving average, before recovering to as high as 130.50+ in today's European session. USDJPY dropped off the map and posted a low all the way down below 92.00, with the action apparently aggravated by large barrier option interest. The news that a coal shipment from Australia to China was cancelled by the Chinese buyer and rumors (now a confirmed news item) about Chinese problems with Australian mining companies aggravated the move, as did a very strong result at the US 10-year treasury auction. On the former story, it has now emerged that a number of Rio Tinto employees have been detained in China during ongoing negotiations about iron ore prices. This took Aussie all over the map. The action was violent enough in the JPY crosses to warrant some stern verbal intervention from the Bank of Japan.

The Bank of England was out with no change to its interest rate and did not change the size of funds to existing QE programs (the APP). With no real news, it was a bit surprising to see the strong reaction in the market and the bout of GBP strength, but perhaps a sizable minority was looking for an announcement that the APP would be expanded more aggressively. All in all, it's tough to draw any surprise factor from the news here and we suspect that GBP will largely follow the broader moves in risk sentiment. From a technical perspective, the recent highs in EURGBP look very important as a line in the sand for any further GBP weakness - see the chart below.

The USD has really disappointed those looking for the correlation with risk appetite to continue (umm - would that be us...?)
as the swoon in stocks and commodities has only brought about a lackadaisical response from the greenback. We're unsure whether to furrow our brow more deeply at the moment on our more bullish USD view or whether this is simply a reflection of the summer doldrums and the tendency of every move of late to retrace back into the ranges as bigger players are staying away here. We'll assume the latter - but yes, the brow is furrowed, and we'd still like to see 1.3750/25 taken out in EURUSD for technical confirmation on USD strength. If the SNB pulls out the intervention sledgehammer over the next couple of session - which it might the rapidly deflating EURCHF rally, USDCHF might be an interesting way to play a next potential up-leg attempt by the USD.

Finally some good news from the US job market, where initial claims eased below the 600k level for the first time. Not to be cynical, but if one thinks about it - considering the number of people out of work is so large, that means that the number of people still working is much smaller than it was a year ago and even a few months ago, so eventually the claims rates will have to fall, unless a growing percentage of remaining workers. There's an awful lot of wood to chop to get the rate back below 400, where it likely must go if we are to see the unemployment rate to begin falling in the months ahead. Nevertheless, the strong jobs data is setting an optimistic tone ahead of the US open, and the S&P500 is sneaking back above the 200-day moving average it sort-of, kind-of broke over the last couple of days (closed very slightly below the MA on Tuesday, with follow up move much lower yesterday intraday before a close within a couple of points of the MA). The recent treachery in the technical signals runs across all markets, it seems.

Published on  Thu, Jul 9 2009, 14:18 GMT