Gold down testing below 1000 dollars/oz. again. Will Japan continue to sell the JPY when it comes back from holiday?


MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Aug. Performance of Services Index rose to 51.3 from 50.1 in Jul.

  • UK Sep. Rightmove House Prices rose 0.6% MoM vs. -2.2% in Aug.

  • Canada Jul. International Securities Transactions out at 0.351B vs. 9.5B expected


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Aug. Leading Indicators (1400)

  • New Zealand Q2 Current Account Balance (2245)

Market Comments:

The market continued where it left off on Friday, as the USD managed to pull stronger across the board, especially vs. the JPY, where the first level of resistance in the 91.75/92.00 area gave way. GBP remains the standout weakling in this market as EURGBP tacked onto gains above 0.9000 and GBPUSD continued lower towards the next key support at 1.6110. EURUSD dropped at a more sedate pace, but is having a look below the 1.4650 support of late as we are writing this.

The commodity currencies are rather weak across the board as we head into the NY open well off last week's highs for the cycle in equities. So far, the dip in risk appetite smacks of consolidation, though the AUDUSD and USDCAD setups are rather interesting for cyclical pivot/reversal arguments: USDCAD has reversed higher from the attempt below 1.0635 recently, and AUDUSD has now dropped well back below the old highs. This suggests some more marked weakening in the trends than we have seen in a while. Are we in for a turnaround and bigger consolidation process here? The FOMC meeting on Wednesday is likely to provide the answer on whether this is a bout of nervousness ahead of the event risk (buy rumor, sell fact, etc...) or whether something bigger is afoot.

In JPY crosses, the weaker bond market has fed the latest rally in JPY crosses, and this is a key week for interest rates with the FOMC meeting and a blitz of new US issuance. With bunds pulling back from the brink once again today, is EURJPY really fairly priced up above 135.00 here in the shortest term considering Japan was out on holiday today?

Interesting to note as a sentiment indicator that gold is mulling a drop back below 1000 dollars per ounce as we head into the NY session.

UK BoE: why the pounding of the pound

The Bank of England released its quarterly bulletin, in which it outline some of the reasons for the very weak pound, including the unwind of the old carry trade, the "apparent need for the UK economy to rebalance" and the unwillingness to hold UK assets due to the massive fiscal expansion. Going forward, it said it expects that UK might see a rise in savings rates as the government may be forced to raise taxes to pay for its debts. These are similar factors that have theoretically driven USD weakness, so it is somewhat confusing to see the USD and the pound moving in opposite directions here - it would seem the GBP sell-off is getting overdone in the shortest term in any case.

Bear to Bull Jim Grant, the famous author of Grant's Interest Rate Observer, was out with a piece this weekend called Bear to Bull that garnered considerable attention. In it, Mr. Grant tries to draw on historical patterns of recovery (the harder the fall, the sharper the rise) and the fact that so many economists are bearish on the prospects of the recovery to make his "contrarian" call - which isn't especially contrarian if we turn on CNBC, really, though there is a significant bear camp out there. Let's all hope that he is right, even if we remain among those who are very concerned about the sustainability of the recovery. The ugly counterargument, after all, is that "Japan happened". As well, Mr. Grant provides no scenario for how the recovery will come about - staking his considerable reputation on the spirit of a great old saying ("The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.") and the sheer hope that history repeats.

Looking ahead

The next few sessions of trading may be treacherous ahead of the week's feature event: the FOMC and any new twist in Fed rhetoric from its monetary policy statement. It is easy to make the argument that the Fed and the US administration are all in favor of a weaker USD, as it helps the country avoid a deflationary trap and improves its competitiveness, but there has to be a point at which the weak USD becomes dangerous. Whether the point is nearing in the Fed's mind is tough to say. Demand for US public debt is still strong - but the blitz of debt creation must stop soon and a credible exit strategy formed, whether the economy turns to strong growth or not. We are nearing a key juncture when the Fed will have to give indications that it is beginning to withdraw monetary stimulus. The first-time home buyer tax credit will soon expire, and the debt monetization program ($300 billion of treasury purchases) has largely run its course. Now we can possibly look for signals on whether the Fed is planning to go about slowing its acquisition of mortgage backed securities as it preps for an exit strategy. That will be the crux of this coming meeting's policy statement: measuring the seriousness of the Fed's exit strategy intent. The Fed is likely to remain very cautious in its wording.

Chart: AUDUSD

The first line of support at 0.8680 gave way, and the focus now shifts to the more structural levels down at 0.8480. AUDUSD will likely remain a slave to the moves in equity indices, and possibly also gold.

AUDUSD