GBP rally showing signs of exhaustion. NOK shrugs off surprising rate cut. SNB promises to defend against CHF strength.


MAJOR HEADLINES – PREVIOUS SESSION

  • Australia Q2 Westpac-ACCI Industrial Trends Index out at 38.3 vs. 34.5 in Q1

  • Sweden May Unemployment Rate out at 9.0% vs. 8.4% expected and 8.3% in Apr.

  • Switzerland SNB leaves Libor target unchanged at 0.25% as expected


THEMES TO WATCH – UPCOMING SESSION

  • Switzerland SNB's Roth and Hildebrand to Speak (0800)

  • UK May Retail Sales (0830)

  • UK BoE to Release Trend in Lending Report (0830)

  • UK CBI Industrial Trends Total Orders (1000)

  • Canada May Consumer Price Index (1100)

  • US Weekly Initial and Continuing Jobless Claims (1230)

  • US Treasury Secretary Geithner to Testify (1330)

  • US May Leading Indicators (1400)

  • US Jun. Philadelphia Fed (1400)

  • Japan BoJ Monetary Policy Meeting Minutes (2350)

  • Japan May Nationwide Department Store Sales (0530)

Market Comments:

Obama's plans for a regulatory overhaul were met with very mixed reviews, but the market reaction seemed unambiguously positive yesterday, as equities rose sharply off session lows (which were also new lows since late May) and the usual suspects in FX responded in kind, with EURUSD rushing higher from the lower end of the recent range and JPY crosses also pushing higher in sympathy. Perhaps the sense that Obama's plans were far from a call for a radical overhaul of existing institutions was the reason for the celebratory response. Let's see how Congress treats the plan and how it survives on the way to becoming legislation. It is rather odd to see Obama suggesting that the Fed should be granted so much new power considering the horrific legacy of Greenspan.

The World Bank was out adjusting its forecast for Chinese growth higher due to encouraging signs from stimulus measures. Was this the same bank that was so accurate in predicting the present global recession, we ask with tongue rather obviously in cheek. To be fair, the World Bank also said that it was too soon to tell whether the recovery will be sustainable. It will be key to see how China growth manages later this year when the stimulus effects begin to fade. In other news, it is most certainly a sign of weakness that the latest stimulus efforts from China come with all manner of "buy Chinese" strings attached. These are actually more directly protectionist than the recent US efforts at the same game. The reaction will certainly bear watching.

Norges Bank somewhat surprisingly lowered rates yesterday by 25 basis points to 1.25%, though a large minority was actually looking for this action. The bank forecast a 1.5% rate in 2010. There were mildly positive words on the economic outlook, which was described as "less pessimistic" (we like this phrase much more than "green shoots"!) than before. EURNOK hardly budged in response, suggesting, perhaps, some underlying strength in the currency. Still, hardly anything has happened of late in that pair as we await a breakout through either 9.00 or 8.70 for a stronger signal. The downside is certainly preferred.

The GBP rally is showing some signs of exhaustion after the pound was unable to maintain new highs after a positive jobs report yesterday and the recent and very positive announcement that the long gilt auction was oversubscribed.
Part of the weakness in the pound could be due to the BoE's King proclamation that more capital would be needed to shore up banks' capital reserves. We can hardly expect an upside surprise to Retail Sales of the magnitude we saw last month. EURGBP resistance comes in at 0.8575 and the key GBPUSD support is at 1.6200.

The SNB was out today with no change to its rate as expected and said that it expected to keep rates at the lower end of the range. More importantly, it promised further defense against CHF appreciation vs. the EUR in no uncertain terms. This makes two things clear: that trading CHF will remain very difficult, and that the natural tendency is for the franc to appreciate. If the EUR-negative story every begins to develop as we feel it surely must, this could really test the mettle of the SNB. 1.5000 remains an interesting line in the sand. Watch the rhetoric from Roth and company today for further guidance.

For today, we look as always at the risk appetite for inputs. It appears that JPY crosses are still a sell on rallies as long as fixed income remains reasonably bid. Still, we're in a rather well defined range, so the market needs to move decisively for better directional indicators here.


Chart: AUDUSD

AUD has been struggling to pick up the rally impulse under the assault of the stronger JPY of late and rise in risk aversion, including relief at the long end of the yield curve. The 21-day moving average has yet to be violated on the close, and the 0.7850-00 area looks like it could open up the floodgates for a full-fledged try at the rising trendline from early March.

AUDUSD