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Risk comeback sees yet another direction change

Thu, Aug 20 2009, 14:01 GMT
by John Hardy

Saxo Bank  |  View company's profile

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Yesterday's USD sell-off disappoints the dollar bulls. Are we really headed back into a range?

MAJOR HEADLINES – PREVIOUS SESSION

• Switzerland Jul. Trade Balance out at 2.35B vs. 1.50B in Jun.

• Japan Jul. Convenience Store Sales fell -7.5% YoY vs. -2.3% in Jun.

• Norway Q2 GDP out at -1.3% QoQ and Mainland GDP out at +0.3% vs. -0.7%/-0.3% expected, respectively

• UK Jul. Retail Sales out at +0.4% MoM as expected

• Switzerland Aug. ZEW Survey out at 18.6 vs. 0.0 in Jul.

• US Weekly Initial Jobless Claims out at 576k vs. 550k expected and 561k the previous week

• US Weekly Continuing Claims out at 6241k vs. 6215k expected and 6239k the previous week

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Jul. Leading Indicators (1400)

• US Aug. Philadelphia Fed (!400)

• US Q2 Mortgage Delinquencies (1400)

• US Treasury Secretary Geithner to Speak (!730)

• New Zealand Jul. Credit Card Spending (0300)

Market Comments:

The daily roller coaster ride in the Shanghai Composite has seen less of a reaction today in FX compared to the fireworks the previous days' action has touched off - especially in JPY crosses. That's perhaps because, while global equities initially sold off yesterday in reaction to a very ugly session in Shanghai, the US market decided to ignore the development and rallied furiously from gap lows at the open. The ability of the US market to ignore China's lead in the short term meant an ugly reversal for those who pounced on the risk averse trade simply due to the tremors in China. Still, the rally in Asia saw the JPY weaker overnight before JPY crosses eased a bit lower in today's European session.

The USD was a big mover to the downside as well yesterday as the sharp reversal in risk slammed the short term USD longs that were being put on in anticipation of a new trend developing. This puts us back in the range again as the USD bulls still need that pesky 55-day moving average in EURUSD to fall on the close to see better confirmation that a potential rally is underway. The squeeze on shorter term USD longs could take us back higher for a retest of the highs in EURUSD, even if this ranging market suggests that both sides are having a tough time finding conviction that will stick...

We're rubbing our eyes in disbelief at a survey from Bank of America/Merrill Lynch indicating that investor optimism is the highest since 2003. 2003 saw a tremendous rally in equities, of course, so one can make that point against the contrarian argument that extreme bullishness is a sign of an imminent top. Still, there seems to be an awful lot of faith in the recovery with no reasonable explanation of how the consumer is going to decide to lay on even more debt. All manner of analysis have shown how GDP of the unhealthy post-2001 recover was largely based on increased debt and how it took more and more dbt. Yes, the Central Banks have "saved us all" by stabilizing the banks and world financial markets, but this has also served to keep all of the debt "alive" rather than allowing the whole system to collapse and The short term horrors have been avoided - but the continued overhang of debt will have consequences for years to come. How will destroy this debt, optimists?

The US Jobless Claims number is a disappointment for those looking for claims to consistently fall. Instead, after troughing impressively in early July, the Claims have ticked up and stabilized in the mid 550's - still an alarming rate of job losses for an economy which already has the worst employment picture in perhaps 70 years (when measured honestly). This week's number is still worse than the very worst single weekly data points during the 2001 and 1990-1 recessions. Still, the key season for jobs comes around the end of September and early October.
This will be the important area for judging whether we are turning the corner in the US employment market.

USDCHF (and he other CHF crosses for that matter) is one to watch here as it eases down to the bottom part of its recent range. EURCHF has also moved back to some of the bigger moving averages. Everyone knows what the SNB wants, the question being where they come in and make their presence felt with another round of intervention. Is that time just about nigh?

Published on  Thu, Aug 20 2009, 14:06 GMT

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