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Directional moves in USD and JPY fail to extend so far as new week gets under way

Tue, Jul 14 2009, 08:01 GMT
by John Hardy

Saxo Bank

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand May Retail Sales out at +0.8% MoM and +1.6% ex Autos vs. +0.2%/+0.5% expected, respectively

• Japan Jun. Consumer Confidence rose to 38.1 vs. 39.5 expected and 36.3 in May

• Switzerland Jun. Producer and Import Prices were steady at 0.0% MoM vs. +0.1% expected and -0.3% in May

THEMES TO WATCH – UPCOMING SESSION

• US Jun. Monthly Budget Statement (1800)

• UK Jun. BRC Retail Sales Monitor (2301)

• UK Jun. RICS House Price Balance (2301)

• Australia Jun. NAB Business Conditions/Confidence (0130)

• New Zealand Jun. Non-resident Bond Holdings (0300)

Market Comments:

Directionality has again largely avoided the scene as we kick off a new week within the summer doldrums of July. In the USD crosses, the bearish reversal from the attempt above 1.4000 has so far failed to get confirmation, and EURJPY was typical of some of the JPY crosses - so far remaining in the range, if in a bit of a volatile fashion, as equities are hanging on by the skin of their teeth and as the bond rally was capped with a consolidation lower ahead of the US open. All in all, another frustrating session for those of us looking for a "move" to develop. Although we've generated enough movement to the downside in equities and bond yields and commodities to maintain interest in a continued move to risk aversion, the lack of convincing momentum is frustrating and makes visibility for the short term poor. Are the summer doldrums going to survive for another six weeks, or do we get real follow through here?

The answer to that question may escape us this week if we are to look at the upcoming data risks for the week, with the major economic calendars relatively sparsely populated. Of most interest is tomorrow's US Retail Sales figures, where consensus expectations are surprisingly strong considering the recent chain store sales reports . One factor that could "artificially" boost the data is gasoline sales, after the enormous rise in prices for the month. The Chinese Q2 growth and other data on Thursday will also be worth watching, as sentiment seems to be shifting a bit on the Chinese attempts at staving off the effects being felt elsewhere with its own credit binge. S&P was even out warning on We have inflation data from the UK, EuroZone and the US this week, but inflation worries have been put on the back burner for now.

The biggest move of note in today's European session, was the move weaker in the GBP as EURGBP resistance around 0.8630 seems to have given way (though typical of today's market, it broke convincingly only to see a retracement of half of the gains for the remainder of the session). The trigger of the sterling sell-off seems to be a report out in the Sunday Times that Lloyds Bank may announce losses of 13 billion pounds. The UK may be an interesting canary in the coal mine as far as the economic cycle goes considering it was out so swiftly with measures to counter the economy's cliff-dive last fall and therefore may be the quickest economy to double dip. We'll watch this week's RICS House Price Balance data and Jobless Claims data with interest for signs of a renewed weakening in the economy is imminent - the adjustment in housing in particular so far has been relatively mild in light of the magnitude of the credit bubble implosion.

While JPY crosses were largely rangebound overnight, there was still plenty of volatility as the shadow minister of the opposition party in Japan (the Democratic Party, which is leading in the polls up to the Aug. 30 election) made a strong statement about preserving the value of Japan's $1 trillion in reserves and promoted the idea of buying IMF bonds. It will be interesting to see in any case, how much more downside in USDJPY the government/BoJ will be willing to countenance before rolling out the intervention artillery. The election cycle will receive increasing focus in the coming weeks.

Chart: USDCAD

Here's a chart that perhaps best reflects the summer doldrums. Since first puncturing 1.1500 on the uptrend on June 22, the action has taken USDCAD nowhere in particular in what we can only describe as a very slow upward churn. This has transpired despite rather interesting developments in equities, bonds and commodities - particularly crude oil, which has dropped about 12 dollars/bbl. over this time frame. The upside remains the side of least resistance as long as we fail to stage a significant rally in risky instruments.

Published on  Tue, Jul 14 2009, 08:14 GMT