GBPUSD tries at 1.7000 barrier. JPY attempting a comeback after yesterday's blowout.


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q2 Private Wages out at 0.3% vs. 0.5% expected

  • Australia Jun. Retail Sales fell -1.4% vs. +0.5% expected

  • Australia Q2 House Price Index rose +4.2% vs. 2.0% expected and -1.5% in Q1

  • Australia RBA left Cash Target rate unchanged at 3.00% as expected

  • Norway Jul. PMI out at 49.7 vs. 49.5 expected

  • Switzerland Jul. CPI out at -0.7% MoM vs. -0.5% expected

  • UK Jul. Construction PMI out at 47.0 vs. 45.0 expected and 44.5 in Jun.

  • EuroZone Jun. PPI out at +0.3% MoM and -6.6% YoY vs. +0.2%/-6.6% expected, respectively

  • US Jun. Personal Income out at -1.3% vs. -1.0% expected

  • US Jun. Personal Spending out at +0.4% vs. +0.3% expected

  • US Jun. PCE Deflator out at -0.4% YoY vs. +0.2% expected

  • US Jun. PCE Core out at +1.5% YoY vs. +1.7% expected and 1.6% in May


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Fed's Tarullo to testify on bank regulation (1300)

  • US Jun. Pending Home Sales (1400)

  • US Weekly API Crude Oil and Product Inventories (2030)

  • US Weekly ABC Consumer Confidence (2100)

  • UK Jul. Nationwide Consumer Confidence (2301)

  • UK Jul. BRC Shop Price Index (2301)

  • Australia Jul. AiG Performance of Service Index (2330)

  • Australia Jun. Trade Balance (0130)

Market Comments:

Overnight, the very ugly Retail Sales number out of Australia is in clanging disharmony with the priced-for-perfection Australian dollar and raises concerns that the Australia stimulus packages' effects are already fading. Meanwhile, the RBA rather hawkishly removed language that suggested the risk of further easing. The RBA is in an interesting situation here as it also recently began bellyaching about the overpriced Australia housing market (also see yesterday's article in the Wall Street Journal for more on the possibility that Australia is in bubble-mode with housing). Let's posit a thesis for the coming six months: the Chinese economy double dips as credit gasoline runs out and they slow their commodity stockpiling and world demand for exports remains sluggish to falling. This hits Australia with a bang, perhaps just as the RBA is mulling its first rate hike. If some of these elements come to pass, the current Aussie themes will look extraordinarily wrong-footed and the Australia dollar could be in for a rude awakening by some time this fall. It's been quite a roller coaster ride for the Aussie over the last year, as it has transitioned from carry super-hero to dog and now back to super-hero again as hopes for a recovery blossom. That roller coaster may be in for another, if somewhat less cataclysmic repeat.
The Aussie looks very mispriced vs. the market.

The CPI data out of Switzerland today is giving fresh reason for the market to sell the franc. The SNB has hammered mercilessly on the deflation point, and this is one of the more deflationary numbers we have seen of late. It raises the risk of the SNB weighing in on the franc on higher levels than it has previously. Our measure of the franc's performance vs. the rest of the G-9 is showing it moving into a relatively strong downtrend now. It is interesting to note the GBPCHF cross up bashing at the 1.8000 level again on the contrasting inflation outlooks.
The test for that pair's ability to trend higher will come with the next round of risk aversion.

Signs of a pause in the latest risk-happy action were everywhere evident in today's European session, a the Scandies paused in their latest torrid rally and the JPY reversed direction rather sharply after yesterday's blowout on fixed income weakness and equity strength. Some of the EM currencies, especially of the CEE variety, were struggling a bit as well after the recent enormous extension of their rally vs. the market. Simple profit taking is clearly one valid reason for the moves today, but we can't help wonder if some of this has been triggered by the nervous action in Chinese equities overnight, where a sell-off intraday was reversed, but where volatility is increasing of late.

Looking around the market for catalysts that will help us find a pivot point in the action now that the risk mongers have climbed almost vertically (would that be our wall of worry they were climbing?) over the last few weeks, we note two things: positioning is reaching extremes in the short USD trade, and sentiment is reaching an extreme in the US equity markets, where there are the fewest bears since May of 2008, which marked the exact equity market top for at the time. With the data later this week on offer, it is certainly possible the bears could put up a significant obstacle starting already this week, but certainly the next 1 to 3 weeks would seem to show rapidly rising odds of a significant correction in this market, which we still view as a massive bear market "sucker rally" (with all of its FX corollaries) until further notice.

Speaking of deflation, the US PCE deflator came out at -0.4% YoY, the lowest level in the 49-year history of the data series. This is very impressive, though we must keep in mind that the year-on-year comparisons are with the height of the oil blowout last summer. We have to wait for the numbers later in the fall for better confirmation or rejection of the deflation theory. The PCE Core number has also posted its lowest YoY number since 2003. The personal income drop for June was rather large, but this was simply a result of stimulus induced fluctuations from Obama's stimulus plans (that saw the May numbers rise at about the same rate that June levels fell.) Personal Income remains in a worry downtrend that is a key input into the deflation argument.