Norway to announce rates today as EURNOK seems to be in no hurry to move out of the range.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Weekly ABC Consumer Confidence fell to -49 from -47 the previous week

  • Australia Q1 Dwelling Starts out at -4.0% vs. -11.5% in Q4


THEMES TO WATCH – UPCOMING SESSION

  • UK BoE Minutes (0830)

  • UK May Jobless Claims Change (0830)

  • UK Apr. Avg Earnings (0830)

  • EuroZone Apr. Trade Balance (0900)

  • EuroZone Apr. Construction Output (0900)

  • Norway Norwegian Deposit Rate Announcement (1200)

  • Canada Apr. Wholesale Sales (1230)

  • US May CPI (1230)

  • US Q1 Current Account Balance (1230)

  • US Fed's Bernanke to Speak (1300)

  • US Weekly DOE Crude Oil and Product Inventories (1430)

  • UK BoE's King to Speak (2030)

  • Australia Q2 Westpac-ACCI Survey of Industrial Trends (0100)

Market Comments:

The BRIC nation ended their discussions yesterday with the standard statements about the need to search for a new solution for a reserve currencies and trade settlement using each others currencies. A Bloomberg article appropriately points out the popularity of the USD-denominated debt of these countries relative to the debt denominated in local currency. Liquidity has its virtues, yet another reason we're not quite yet willing to ignore the prospects for a dollar recovery in the short/medium term if risk aversion returns with a vengeance.

The BoE minutes are up today as sterling has traded at remarkably new levels vs. the EUR, though momentum seems to be fading a bit from that trade. The market may pay more attention to the Jobless Claims number as it continues to look for green shoots in the UK economy. The sterling's resilience was underlined yesterday by a very strong long gilt (25-year) auction that was oversubscribed, a resounding success relative to auctions that actually failed in March. But will the GBP rally prove vulnerable on a further extension in risk aversion?

Norges Bank is on tap today as movement in EURNOK continues to go nowhere fast. Perhaps the bank will give the market something to think about. We would certainly prefer holding NOK vs. the EUR, but the market was burned badly by return in risk appetite that frustrated bets in Q1 and earlier this quarter that the NOK was the new and better safe haven trade. Gjedrem has rattled his saber at speculators who threaten to strengthen the currency, a bit surprising with the NOK still at historically relatively weak levels vs. the EUR - but worth paying attention to considering the relatively low liquidity of the currency. Gjedrem and company are unlikely to move rates, and if they cut them, it may provide for better entry levels for shorting EURNOK.

On the bad European banks front, S&P was out with a dour review of Europe's banks, indicating that losses were likely to mount (similar to recent ECB warnings) and that government bailout money was the most likely source of funds to plug the holes, since the equity markets were unlikely to prove willing to inject sufficient capital.

Yesterday saw a sharp drop in long yields as the risk aversion ticked sharply higher in the North American session. The 10-year benchmark has already fallen 35 bps over the course of the last week after topping right out at the round 4.00% in yield level. The Fed apparently showed up strongly on the bid side during the 3-year auction, perhaps aggravating the move and making a bit of a statement about what it wants to happen as well. Lower yields understandably came to the aid of the Japanese Yen, which has pulled back much stronger across the board after weakening to new lows vs. most of the other major currencies. The reversal would appear to threaten the weak Yen trend in some of the key crosses. See the EURJPY chart below for a specific example.

Outside of JPY crosses, it seems we are stuck in the limbo of the ranges for the USD majors after EURUSD failed to hold lower and as AUDUSD and USDCAD have failed to break recent extremes. Again, the key test for the USD at the moment seems to be to what degree risk aversion is able to provide strength to the currency. Speculation is justifiably mounting over the message the Fed will send at next Wednesday's FOMC meeting considering the market's recent bold moves in predicting high odds for tightening by year's end. Until then 1.4000 seems a key resistance level in EURUSD for the tactical minded, while the 1.3720 area is a more structural support for the pair and for the USD. For risk aversion more broadly, the S&P yesterday almost grazed its 200-day moving average - another line in the sand for all markets. If the USD is unable to rally in these conditions, then the scenario changes - this seems to be a pivot point either way.


Chart: EURJPY

EURJPY is approaching interesting levels down near the 55-day moving average and the rising trendline. These will need to give way if we are to definitively discuss a trend reversal for the pair. A continued easing in bond yields would be a supporting indicator.

EURJPY