Bernanke in firing line today on BofA/Merrill Lynch deal.
USD showing some fight again, but persistent ranges need to fall for stronger directional signal.
HEADLINES - PREVIOUS SESSION
- Sweden Jun. Consumer Confidence out at -9.0 vs. -8.8 expected and -11.0 in May
- Sweden Jun. Manufacturing Confidence out at -31 vs. -30 expected and -34 in May
- Sweden May PPI out at -0.5% MoM and +2.9% YoY vs. -0.1%/+3.5% expected and -0.9%/+3.2% in Apr.
- EuroZone Apr. Industrial Orders out at -35.5% YoY vs. -32.8% expected and -26.5% in Mar.
- US Q1 Final GDP adjusted to -5.5% vs. -5.7% expected
- US Q1 Personal Consumption rose 1.4% vs. 1.5% expected
- US Weekly Initial Jobless Claims out at 627k vs. 600k expected and 612k the previous week
- US Weekly Continuing Claims rose to 6738K vs. 6714k expected and 6709k the previous week
THEMES TO WATCH – UPCOMING SESSION
- US Fed's Bernanke to Testify on BofA/Merrill Lynch deal (1400)
- New Zealand Q1 GDP (2245)
- UK BoE to Release Financial Stability Report (2301)
- Japan Tokyo Jun. CPI and National May CPI (2330)
Market Comments:
The repercussions of the FOMC meeting are not terribly evident in today's trade, with only a slightly stronger USD pushing back at the edges of some of the recent ranges. Again, the immediate takeaway from the meeting was that the Fed underlined its commitment to keep short rates low - no real surprise - and did not mention any worry about the long end of the curve or outline any new efforts to expand asset or treasury purchases. This latter "development" saw a slight correction higher in yields and the USD, but has failed to generate enough excitement so far to pressure the ranges. Still the USD looks in much better technical shape now for a potential rally than it did just the previous day, so we watch the 1.6200 are in GBPUSD and the 1.3800 area in EURUSD with extreme interest here. Considering the string of disappointments when looking for technical breaks lately, however, seeing is believing in this market.
The weak US weekly jobless claims number was a disappointment for the green shoots view and saw another burst of risk aversion ahead of the US open. Looking at basic risk benchmarks outside of FX, we are keen to see if the US S&P500 breaks down much further through its 200-day moving average, since this kind of watershed event will need to see a more pronounced reaction in FX than the seemingly eternal rangebound action we have seen over the last few weeks. The technicals look ugly there. Interest rate spreads are also sending very EUR-negative signals that the market doesn't seem to be listening to. It certainly feels that pressures are building for some bigger moves here, moves that are likely to go in the opposite direction of the trends that existed before this bout of rangebound activity. See a EURJPY chart below for an example of some interesting break levels in that pair.
With risk aversion half-heartedly rearing its ugly head of late, AUD is in an interesting spot. Some mysterious force has buoyed copper strongly in today's session, and gold too is trading rather resiliently considering the slightly stronger greenback. Higher metals prices are AUD positive. Yet bonds are slightly resilient and equities are looking weak -- normally AUD-negative factors. Have a look at the likes of AUDNOK and AUDCAD to see how relatively strong the Aussie remains in some of the crosses. Can this really be sustainable? We fear not....a spectacular unwind may be in the works for the currency before too long. On a broad measure, AUD is trading within 5-7% of its all time high at the height of the credit bubble. One of the bigger movers if an AUD unwind develops, of course, would be AUDJPY, where the rally is showing signs of exhaustion. One can only take a glance over at the other big commodity currency, CAD, to see the fate that may await the Aussie. Caveat emptor!
Watch the Bernanke testimony today on the BofA/Merrill Lynch deal. We suspect Bernanke will defend his honor successfully, but representative Issa's accusations of a "cover up" are incendiary and it will be interesting to see if there is the mood of scapegoating/witch-hunting in the Congress because the political positioning around whether Bernanke will be reappointed in January as Fed chairman is a very big issue for the medium term.
Chart: EURJPY
Interest rate differentials suggest EUR trades at a very significant premium above "fair" levels - particularly versus the likes of the JPY. Here is the EURJPY chart once again, where we focus on a daily close either above the 21-day moving average (blue) or below the 55-day moving averager (in red) for the next directional signal, with an obvious bias to the downside due to the fundamental situation and the structural technicals.
