G-8 this weekend on tap. JPY crosses eyeing long end of the curve.
MAJOR HEADLINES – PREVIOUS SESSION
- UK May NIESR GDP estimate out at -0.9% (QoQ for rolling 3 mo.) vs. -1.5% in Apr.
- New Zealand RBNZ left the Cash Target unchanged at 2.50% as expected
- New Zealand May Business PMI out at 42.7 vs. 43.7 in Apr.
- New Zealand May REINZ House Sales rose 43.9% YoY vs. 39.6% in Apr.
- Japan Q1 GDP final estimate adjusted up to -3.8% QoQ vs. original -4.0% estimate
- Australia May Employment Change fell -1.7k vs. -30.k expected
- Australia May Unemployment Rate rose to 5.7% as expected and vs. 5.5% in Apr.
- China May Trade Balance out at +$13.39B vs. +$14.9B expected
- Sweden May Headline CPI out at -0.4% YoY vs. -0.5% expected
- Canada Q1 Capacity Utilization Rate out at 69.3% vs. 71.5% expected and 74.7% in Q4
- US May Advanced Retail Sales out at 0.5% as expected and +0.5% less Autos vs. +0.2% expected
- US Weekly Initial Jobless Claims out at 601k vs. 615k expected
THEMES TO WATCH – UPCOMING SESSION
- US Apr. Business Inventories (1400)
- US Fed's Lockhart to Speak (1705)
- New Zealand Apr. Retail Sales (2245)
- China May Retail Sales (0200)
- China May Industrial Production (0200)
- Japan May Consumer Confidence (0500)
Market Comment:
The Australian employment report out overnight saw yet another surge in AUD almost across the board. While the headline change in employment payrolls was much better than expected at almost unchanged levels, the internals of that headline number are somewhat more troubling, with full time employment falling sharply and part-time employment rising sharply - somewhat like some of the trend in Canada. As well, the unemployment rate surged to 5.7% from an upwardly revised 5.5% in April. This matches the highest level since late 2003. AUD continues to find strength as bonds have not managed to rally and equities stormed back into the close yesterday in the US after a steep intra-session sell-off. The background theme, of course, for Aussie strength is the idea that the global recovery, led by China, is underway. Look at the New York times business section this morning for an interesting article about Chinese commodity buying and serious questioning of its sustainability. If this theme is disappointed in the near future, which we fear it may be, the Aussie could be in for a very sharp adjustment lower across the board. Chinese trade numbers are still off sharply for both imports and exports on year over year comparisons.
The one currency out-performing AUD overnight was the kiwi, as the RBNZ left rates unchanged as expected and as the rate of home sales rose sharply again on year-over-year comparisons. The RBNZ's Bollard said that the recovery is likely to be slow and fragile and that "it's likely to be some time before monetary policy support can be withdrawn." It sounds dovish on the surface, but the discussion of tightening and therefore an eventual reversal in monetary policy trajectory puts the central bank far ahead of others. The structural appearance of the AUDNZD chart is a bit intriguing here - are the highs in? We'd like to see how the pair behaves on a fresh wave of risk aversion before making that call.
The US 10-year auction got a lot of attention yesterday. While the bid to cover ratio appeared healthy, the auction still resulted in new high yield for the cycle at 3.99%. It was interesting to note that the sharply higher yields got enough attention to actually temper enthusiasm in the equity markets, which swooned on the auction results only to recover later in the day. This suggests that the bond market is the primus motor here as it should be. Looking at risk appetite as measured by equities, it is interesting to note the extreme uncertainty with four near "dojis" on the daily candlesticks for the S&P500 futures. The focus on US treasuries and the market's appetite for them continues today with the auction of 30-year T-bonds. USD and JPY pairs are the most likely to be impacted. USDJPY has failed to follow through higher after its big rally on Friday last week and moves in the long end of the US yield curve could either bolster or reject the rally. It feels like the JPY sell-off is getting very stretched at these levels on a broader basis, but the JPY will likely need some support from the US treasury market to gain a better toehold for a rally.
The US Advance Retail Sales number looks rather strong on the face of it, though if we strip out the gasoline station rise of +3.6% - mostly due to higher gasoline prices, of course, then the numbers are virtually unchanged at +0.1%. Still, with YoY declines in US retail sales at an unprecedented -10% and worse, an unchanged number looks reasonably strong. The June numbers could be skewed higher by liquidation sales from Auto dealers closed as part of the Chrysler and GM downsizing, though the ex Autos numbers should be cleaned of some of this effect and some of the more seasonal effects that occur in the April/May timeframe due to the spring/summer shift. The US jobless numbers were marginally encouraging, with another small downtick in claims to almost the -600k number, but with a rise in the Continuing Claims number and an upward revision to last weeks continuing claims number, thus erasing the first apparent decline in continuing claims in , which was a disappointment after last week saw the first downtick in this number since the first week of the year.
So keep an eye on US Treasuries today and the equity market to see where the risk barometer will swing next. Tomorrow doesn't have any risk events of great import, though the G-8 meeting this weekend is generating the usual amount of noise. The topics are expected to be "exit strategies" from the massive liquidity and easing campaigns of this downcycle (where is end demand headed, we shout from every high place...) and the US defending its ability to eventually repay all of its debt after this latest rise in the long yields and the worry it has generated.
Chart: USDJPY
The pair saw a very strong surge on Friday after the better than expected US payrolls numbers (which were debatable for a number of reasons as always due to statistical adjustments, etc...), but this week has failed to see the trade following through higher as long bond yields in the US have also teetered on the brink of capitulation without ever really following through lower. Our rule of thumb for impulses is that three days of consolidation is the maximum you should allow before the odds dramatically drop for a follow through in the rally. That means that the rally should either follow through today or face risk of a reversal in coming days. The lower edge of the Imoku cloud and the 97.25 area appear to the be the key support zone for the pair.
