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Central Banks in the crosshairs this week

Mon, Nov 2 2009, 14:33 GMT
by John Hardy

Saxo Bank

JPY crosses gyrate, GBP swoons as pivotal week gets under way. US ISM Manufacturing on tap.

MAJOR HEADLINES – PREVIOUS SESSION

• China Oct. PMI Manufacturing out at 55.2 vs. 54.7 expected and 54.3 in Sep.

• Australia Oct. Performance of Manufacturing Index out at 51.7 vs. 52.0 in Sep.

• UK Oct. Hometrack Housing Survey rose +0.2% MoM and fell -4.6% YoY vs. +0.2%/-5.6% in Sep.

• Australia Q3 House Price Index rose 4.2% QoQ and 6.2% YoY vs. 3.0%/4.3% expected, respectively

• Japan Sep. Labor Cash Earnings fell -1.6% in Sep. vs. -2.1% expected

• China Oct. HSBC Manufacturing PMI out at 55.4 vs. 55.0 in Sep.

• Sweden Oct. Swedbank PMI Survey out at 56.7 vs. 55.5 expected and 55.9 in Sep.

• Switzerland Oct. SVME PMI out at 54.0 vs. 54.8 expected and 54.3 in Sep.

• UK Oct. Manufacturing PMI out at 53.7 vs. 50.0 expected and 49.9 in Sep.

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Oct. ISM Manufacturing (1500)

• US Sep. Pending Home Sales (1500)

• US Sep. Construction Spending (1500)

• US Fed's Tarullo to Speak (2000)

• New Zealand Q3 Private Wages/Average Hourly Earnings (2145)

• Australia RBA Cash Target (0330)

Market Comments:

This week has already picked up where last week left off, with yet another direction change in most of the USD crosses in Asian and European trading, though so far, the USD sell-off has been somewhat weaker than Friday's USD rally. Clearly, the market is on tenterhooks after the dramatic expansion in volatility late last week and wondering whether this was a calendar month phenomenon or the real deal as we go into a new month and a week packed with event risks.

JPY volatility

As if volatility wasn't bad enough, JPY crosses swooned due to some bizarre situation in Tokyo with the ZARJPY cross and a misquote that triggered all manner of stop-losses across the board - even in other JPY crosses, so the sell-off and comeback that appears on the charts may be an artificial development from a technical perspective. It was interesting to note, nonetheless, that EURJPY once again found support right at its 200-day moving average, as the overnight action underlines that level as critical for the longer term outlook. JPY crosses are likely to remain the high beta crosses this week with all of the economic data and central bank's decisions weighing on both risk appetite and interest rates as cross-market volatility is clearly heating up here.

Tonight's RBA

AUDUSD slipped to a new low overnight in the Asian session, but that low couldn't hold after strong house price data has the market looking for that extra bit of hawkishness in tonight's (Asian Tuesday) RBA rate announcement. Rate differentials between AUD and the USD (and more other currencies, for that matter) are still well off recent highs, so whatever the RBA has planned, it will need to reinvigorate spread widening for the AUD to regain the upper hand across the board. Risk appetite will also need to make a comeback for the AUD rally to get back on track. As we suggested last week, the AUDUSD rally may be facing structural threats from a technical perspective. Regardless of that latter fact, if the minority of analysts looking for a 50-bp. hike tonight are correct and risk appetite snaps back, we could see a rush back to 0.9300 in a hurry. This is a busy week for data out of Australia as well, with the AiG services survey and Sep. Retail Sales set for release in Australia's Wednesday session.

GBP fadeaway

GBP fell out of bed to start the week after its rather odd bout of overexuberance late last week. The poor growth data from Q3 suggests the market may be looking for the waffling BoE to lean more on the side of QE than it expected before the latest batch of numbers. Still, home price data suggests that the easy money policy continues to prop up asset prices and the latest manufacturing PMI out today was quite strong. Industrial and Manufacturing Production data are also out on Thursday just ahead of the BoE decision. Regardless of the direction in risk appetite this week, we suspect that the USD will outpace GBP unless the BoE comes out with a more hawkish message on planned exit from QE than we or the consensus expect. Tactically speaking, the line of support around 1.6350 is interesting for today's US session, and the two-week low at 1.6250 is the bigger potential downside trigger.

Looking Ahead

The US ISM manufacturing data is not likely to surprise to the downside today after two of the three regional surveys surprised strongly to the upside in October. The market has bigger fish to fry than the ISM anyway this week, and many are writing off any uptick in the manufacturing side of the US economy as part of the inventory restocking cycle, especially in autos after the Cash for Clunkers depleted inventories. Remember once again that we have the RBA up tonight, the Fed up on Wednesday, and the ECB and BoE on Thursday. This is all capped off with the US employment report Friday. Certainly a week for treading carefully!

Chart: GBPCHF

GBP found important resistance today it seems, as evidenced in a cross like GBPCHF, where the two-wave correction appears complete after an attempt at the 55-day moving average. The sell-off back through the old high suggests that further weakness toward the rising line of consolidation is the path of least resistance for the moment.

Published on  Mon, Nov 2 2009, 14:37 GMT