EUR continues to break down ahead of Thursday's ECB decision. UK and US trade balance on tap today.
MAJOR HEADLINES – PREVIOUS SESSION
-
New Zealand Q4 NZIER Business Opinion Survey fell to -64 from -19 in Q3
-
Japan Nov. Adjusted Current Account Total out at ¥654.1B vs. ¥625B expected
-
UK Dec. RICS House Price Balance out at -73% vs. -74% expected and -76% in Nov.
-
China Dec. Trade Balance out at +39.0B vs. 34.0B expected
-
Japan Dec. Eco Watchers Survey: Current out at 15.0 vs. 20.4 expected and 21.0 in Nov.
-
Japan Dec. Eco Watchers Survey: Outlook out at 17.6 vs. 24.7 in Nov.
-
Germany Dec. Wholesale Prices fell -3.3% YoY vs. -0.8% in Nov.
THEMES TO WATCH – UPCOMING SESSION
Events Today:
-
Sweden Dec. Headline and Underlying CPI (0830)
-
UK Nov. Visible Trade Balance (0930)
-
UK Nov. DCLG UK House Prices (0930)
-
US Fed's Bernanke to Speak in London (1300)
-
Canada Nov. International Merchandise Trade (1330)
-
US Nov. Trade Balance (1330)
-
US Treasury's Kashkari to Speak on TARP (1430)
-
US Dec. Monthly Budget Statement (1900)
-
US Fed's Kohn to Testify on TARP before House committee (1900)
-
New Zealand Nov. Building Permits (2145)
-
US ABC Weekly Consumer Confidence (2200)
-
US Fed's Lacker to Speak (2200)
-
Australia Nov. Home Loans and Investment Lending (0030)
-
Japan Dec. Machine Tool Orders (0600)
Market Comment:
UK Retailers saw a scary drop in consumption in December, as the BRC reported overnight that Dec.
same store sales dropped 3.3% year on year and 1.4% in total. This was the largest drop in sales in 14 years. The British Chambers of Commerce reported the weakest results in its survey of thousands of company since the survey began in 1989. On the home sales front, December saw the fewest homes changing hands since measures began in 1978 on the unavailability of credit. Despite this, the RICS house price balance has been slowing rising from it's trough last spring. The pound has weakened sharply against the USD over the last couple of days and even lost some of its recent gains versus the EUR, but we wonder how much further downside potential it has in the short term as so much misery is already priced in and the focus seems to be shifting more to the Euro malaise now. EURGBP short trades are the preferred way to play for any GBP resilience.
S&P threatened to downgrade Spain's sovereign debt from its AAA rating, which, if it came to pass, would put Spain in the company of Belgium, Italy and Portugal, the only European countries not to have AAA rating. S&P cited Spain's large current account deficit (a whopping 10% of GDP) and "the need for the private sector to restructure and de-leverage balance sheets...." This news came on top of Friday's threat to Greece's credit rating and the cut in Ireland's outlook. All in all, the picture for the Euro is looking grim and the short end of the curve in the EuroZone has the market predicting that the ECB will have to capitulate on its cautious, reluctant rate cutting regime. Still, selling the Euro may get trickier as the ECB meeting approaches this Thursday and some profit taking by shorts sets in - possibly around the 55-day moving average at 1.3180. Another factor implicated in the weak EUR lately is the rapid step by step devaluation taking place in the Russian Ruble, as the authorities look to let the ruble go in stepwise fashion. The ruble has lost over 30% of its value versus the USD since the July peak in oil prices.
The S&P overnight also revised the outlook on New Zealand's rating on foreign currency denominated debt to negative from stable, even though it reaffirmed its ratings on NZD denominated. This smacked the kiwi for heavy losses across the board and NZDUSD is breaking down below its 55-day moving average overnight. Adding to the kiwi's woes was the worst ever NZIER Business Opinion Survey in Q4, which dropped to an astounding -4 from -19 in Q3
The equity markets followed through to the downside and this put the carry trades under pressure as one would expect in such a situation. EURJPY tumbled below 119 for the first time in almost a month and AUD and CAD were hit even harder by yesterday's intermarket developments. USDCAD swooped all the way up to just under its 55-day moving average above 1.2200 this morning, and looks headed for more if this move in risk aversion extends - see chart below. 1.3000 may even come back into view on this cycle if we pick up some momentum.
Looking ahead, it is interesting to note that key levels in equities are giving way just a week ahead of Obama's inauguration. The "hope" rally begun in the dying days of 2008 only managed to limp along for three days into the New Year and now we wonder whether the market moves into another round of outright risk aversion and probing of the lows or whether we are just establish a wide range that is unable to give way on either side. The former of these scenarios has better probability if enough market participants are demoralized by the inability of the market to rally and end up capitulating on their holdout positions.
The US Trade Balance for November is up today and the slowdown in oil prices and consumption may show it at the lowest level since 2004. The Chinese trade figures out overnight also show trade activity collapsing as the former global trade paradigm is breaking down - what will replace it is an open question - and one seeing endless debate. This is the most pressing economic issue going forward and we'll be touching on it more in the future.
Chart: USDCAD
With tumbling oil prices and a resurgent greenback, USDCAD may look for some further upside here, especially if the 55-day moving average gives way (red line). The numbers coming out of Canada are showing clearer signs of deterioration, so another try at 1.3000 and possibly more could be in the wings for the pair, especially on further general risk aversion.
