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Mixed message from the Fed gave the risk trades the green light once again overnight

Thu, Aug 13 2009, 14:34 GMT
by John Hardy

Saxo Bank  |  View company's profile

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JPY crosses reversing once again on weak US numbers and boost from a fresh US Treasury rally.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Jul. Business PMI out at 49.7 vs. 46.5 in Jun.

• Germany Q2 GDP out at +0.3% QoQ vs. -0.2% expected

• Switzerland Producer and Import Prices out at 0.0% vs. 0.1% expected

• Sweden Jun. Industrial Production/Orders out at -2.5%/-4.2% MoM

• EuroZone Q2 GDP estimated at -0.1% QoQ vs. -0.5% expected

• US Jul. Advance Retail Sales out at -0.1% vs. +0.1% expected

• US Jul. Advance Retail Sales less Autos out at -0.6% vs. +0.1% expected

• US Jul. Import Price Index out at -0.7% MoM

• US Weekly Initial Jobless Claims out at 558k vs. 545k expected

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• New Zealand Jul. REINZ House Sales (2200)

• New Zealand Jun. Retail Sales (2245)

• Australia Reserve Bank Governor's Semi-annual Testimony to Parliament (2330)

• Japan BoJ Monetary Policy Minutes for May (2350)

Market Comments:

The bears were gouged once again yesterday by a new wave of positive sentiment, supposedly generated by the FOMC meetings outcome. In our estimation of the Fed's new monetary policy statement, the message was little more than a "wait and see" one and it is as if everyone looked around, shrugged their shoulders and decided to plow their money back into the risk trade. After all, we have the great news that Walmart, the world's largest retailer, and supposedly a large benefactor in this environment of economic weakness as consumers "trade down". reported a fall in sales or the second quarter. A Bloomberg article reports that the "stronger dollar reduced the value of overseas sales" (of Walmart). Someone forgot to check their charts, as the USD was rather weak in Q2 - not strong. Judging from the reactions in the currency market relative to other markets, it appears we are back to the old status quo with the fresh run higher in stocks punishing the USD and stable to rising bond yields pushing the JPY back lower as well. The commodity currencies are the knee-jerk big gainers, as one might expect.

Euro sentiment was bolstered by the positive GDP reports released today. While the QoQ figure showed a 0.3% uptick, the year on year figures are still rather dire and it is easy to argue that this was a dead cat bounce quarter after the vicious initial pullback in the Germany economy in Q4 and Q1- as the global recession hit the producing countries like Germany and Japan the hardest. The various PMI numbers have not been particularly robust of late, so let's see if the upside surprise can continue with much conviction in Q3.

A brief review of the FOMC statement: The first headlines out of the Fed appeared hawkish, as the Fed announced that it was not increasing its treasury buying program and was leaving its other asset purchase programs untouched. The only tweak was an announced extension of the Treasury buying into October, from the previous September goal. This is only seen as hawkish if we are to compare it with the recent BoE moves, in which QE was actually expanded. The rest of the Fed's statement about the economy were extremely neutral - only observations of the obvious stabilization that has occurred. The overall impression: the Fed has moved into wait and see mode - still worried about the slack in the economy and unemployment, noting the positive stabilization and hoping that it results in stronger growth moving forward, and at the same time utterly unworried about inflation (being very specific in forecasting that it saw it unlikely that inflation would become a menace at any time before the end of 2012). That later statement was the dovish flourish that made this new statement a rather neutral one overall. Bonds were mostly unchanged coming into today's session after yesterday's record 10-year auction drew weak interest (this was before the Fed statement).

Bonds were back sharply to the upside after the weak US Retail Sales number for July, which was much weaker than expected and a challenge to the green shootists out there. A $15 billion 30-year auction is up today and the demand picture may have changed since the FOMC statement. Bonds will certainly be a key to watch after the frenetic swings in the JPY crosses. EURJPY, to take an example, as swung back and forth by multiple big figures for the last few days.

Technically, our measure of the USD strength failed to follow through critical resistance after the Fed meeting yesterday and seems to be in "throwback" mode at least. In EURUSD, the interesting area of resistance is the 0.618 Fibo resistance for the latest down wave in the 1.4315 area, just below the highs on the day thus far.
Strong resistance there is a sign that the USD bulls may gain the upper hand here. But a rally to much above that level and the market may have to contend with a full retest of the lows in the USD.

Chart: EURJPY

Yet another reversal? Here we go again with the EURJPY circus. If we close at current levels or lower, it's looking like a pretty convincing reversal for EURJPY - though we need to work back below 134.00 to discuss the possibility of a new downtrend...

Overall, the market liked the mildly hawkish approach and began to embrace risk again. The USD retreated from its pre-FOMC highs and the commodity currencies rebounded. Asian bourses followed on from wall St’s firmer close and most posted gains around 1%. The Shanghai Composite lagged behind however, suffering from a hangover of 6 sessions of selling, and proved to be a drag on the rally in the JPY crosses.

Published on  Thu, Aug 13 2009, 14:41 GMT

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