- USDCAD below 1.1000.
- AUDUSD nearly touching 0.8000.
- Geithner on the way to China to plead his case. Ugly Chicago PMI reading challenges green shoots theory.
MAJOR HEADLINES – PREVIOUS SESSION
- Japan Apr. Housing Starts fell -32.4% YoY vs. -22.0% expected and -20.7% in Mar.
- Germany Apr. Retail Sales rose +0.5% MoM as expected and fell-0.8% YoY vs. -0.3% expected
- UK May Nationwide Housing Prices rose 1.2% MoM vs. -0.9% expected and fell -11.3% YoY vs. -13.7% expected
- Sweden Q1 GDP out at -0.9% QoQ vs. -2.7% expected, but Q4 revised down to -5.0% QoQ vs. -2.4% originally estimated
- Norway Mar. Retail Sales rose 1.4% MoM vs. +0.6% expected
- Switzerland May KOF Swiss Leading Indicator fell -1.86 vs. -1.78 expected
- Canada Q1 Current Account out at -9.1B vs. -10.3B expected
- US Q1 GDP revised up to -5.7% from original -6.1% estimate and -5.5% expected
- US May Chicago PMI out at 34.9 vs. 42.0 expected and 40.1 in Apr.
THEMES TO WATCH – UPCOMING SESSION
- US May Final University of Michigan Confidence (1400)
Market Comment:
The USDJPY rally fizzled after yesterdays extension of the bond rout finally turned tail and buying came in, pushing USDJPY sharply back lower. Equities decided to take the stabilization of rates as good news and bulled higher ahead of the US session. The USD continues to act as the flipside of risk appetite and the theme that we are in the midst of a dollar devaluation. The dollar index lost further ground, pushing to new lows for the year just below 80 this morning. All other markets responded in unison with the classic, reflexive implications - particularly commodities, where oil is above 65 dollars a barrel and gold looks set to threaten the symbolic 1000 dollar mark.
US Treasury Secretary Geithner is making his way to China this weekend. This is an interesting visit considering Geithner's controversial statements during his confirmation hearings that China is manipulating its currency. The obvious agenda for his trip is outlined by the standard business publications: namely to pressure China to allow its currency to appreciate and jump start Chinese domestic consumption to temper the gross current account surplus that is part of the entire global imbalance phenomenon of the last decade and more. As well, Geithner will no doubt also attempt to reassure China that the value of its enormous piles of US dollar reserves is not at risk with the Fed's and Treasury's money printing shenanigans (good luck, sir!). There is also some silliness about climate change in the mix, as this rates highly on the Obama agenda. Considering some of Geithner's previous appearances one might wonder if he has the diplomatic panache to pull off an effective appearance, his international background notwithstanding.
The bigger question is this: if China finally allows its currency to appreciate versus the dollar as the Yuan NDF's are attempting to predict (12-month Yuan NDF's have risen sharply versus the USD this year even as the spot exchange rate has not budged), would this necessarily trigger a further weakening of the USD across the board or mostly versus the Yuan and other Asian currencies. It would seem the isolated movement would be sharper in Asian currencies, so something like a synthesized AUD/CNY or EUR/CNY short might be an idea for those looking for this kind of a revaluation, which seems necessarily inevitable and merely (!) a question of timing. If the reval doesnt transpire, then the trade goes wrong as long as the USD is weak, of course...
The US growth figure was revised up to -5.7%, but the 2 quarter contraction of the US economy is still the worst since a brief episode in the late 1950's then growth rates were very volatile. With the Fed seemingly losing control over the long end of the yield curve and joblessness, we are having a bit of a hard time seeing a strong growth rebound in Q2, though the inventory rebuilding and stabilization in financial markets will prevent the rate of contraction we saw over the last two quarters. While on the subject of the much discussed inventory-rebuilding supposedly under way, it was more than interesting to note that the Chicago PMI today was very disappointing - an amazingly weak reading considering the comparative nature of the survey. Order backlogs registered their second lowest reading since the recession began, and employment was at index 25 - the lowest reading for the cycle. Challenges may mount going into Q3 and Q4 if final demand doesn't tick up - and again, when we look at a 9%+ national delinquency rate for outstanding mortgages in Q1 reported yesterday and the unemployment rate likely closing in on 10%, where is the final demand going to come from in the US economy?
The Norwegian Krone looks like an interesting play at this point as it is tough to build an argument for a weaker krone regardless of whether the current trend of higher equity - and oil - prices continues or whether we move back into risk aversion mode, especially as relates to worries over the seemingly forgotten issues facing the single currency: namely the skeletons still in the closet at European banks and the potential for Recession, Round 2, to renew questions about the viability of the EuroZone framework. Is EURNOK of 9.00 an effective ceiling for the medium term?
Chart: EURNOK
EURNOK is showing signs of exhaustion in its weak rally attempt of the last two weeks. Is the 9.00 area an effective ceiling?
