EURUSD survives attempt down through weekly pivot and makes comeback on strong German IFO


MAJOR HEADLINES – PREVIOUS SESSION

  • Australia Sep. Conference Board Leading Index rose 0.3% vs. 1.5% in Aug.

  • Japan Oct. Supermarket Sales fell -5.2% YoY vs. -2.4% in Sep.

  • Switzerland Oct. UBS Consumption Indicator rose to 0.867 vs. 0.671 in Sep.

  • Switzerland Q3 Employment Level rose +0.2% vs. -0.8% expected

  • Sweden Oct. PPI fell -0.4% MoM vs. -0.1% expected

  • Germany Nov. IFO out at 93.9 vs. 92.5 expected and 92.0 in Oct.

  • Norway Q3 GDP rose 0.9% QoQ vs. 0.8% expected.

  • Norway Q3 Mainland GDP rose +0.5% QoQ vs. +0.8% expected

  • UK Oct. BBA Loans for House Purchase out at 42238 vs. 44000 expected and 42073 in Sep.

  • EuroZone Sep. Industrial New Orders rose 1.5% MoM and fell -16.5% YoY vs. +1.0%/-17.3% expected, respectively

  • US Q3 GDP revised down to 2.8% (annualized) as expected and vs. the first 3.5% estimate


THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

  • US Sep. S&P/CaseShiller Composite 20 Home Price Index (1400)

  • US Nov. Consumer Confidence (1500)

  • US Nov. Richmond Fed Index (1500)

  • US Sep. House Price Index (1500)

  • Switzerland SNB's Roth to speak (1830)

  • US FOMC Minutes (1900)

  • US Weekly API Crude Oil and Product Inventories (2130)

  • US Weekly ABC Consumer Confidence (2200)

  • Australia RBA Deputy Governor to Speak (2220)

  • Japan Oct. Merchandise Trade Balance (2350)

  • Japan Oct. Corporate Service Prices (2350)

  • Japan BoJ Deputy Governor Yamaguchi to Speak (0045)

  • Japan Nov. Small Business Confidence (0500)

Market Comments:

It looked a bit dicey overnight for the risk trade after Chinese equities fell as much as 8% in Asia on new efforts by Chinese regulators to crack down on banks capital reserve ratios in an attempt to slow/reverse the inflation of the raging overinvestment bubble in China, particularly in the property sector. The Chinese authorities have perhaps looked at the US example on the kind of damage overinvestment in real estate asset can wreak on an economy. The question at this point is whether they are too late - stories abound about the empty skyscrapers of Beijing and the entire city built in Inner Mongolia that still stands largely deserted. As a brief backdraft swept through the markets on the Chinese developments, the EURUSD benchmark was down testing its weekly pivot just below 1.4900 before rallying strongly. AUD fared less well, swooning as low as 0.9131 before making a strong comeback attempt in a more upbeat European session featuring a stronger than expected surge in the IFO survey.

Strong JPY

The JPY remains strong after yesterday's comeback in bonds and perhaps due to the Bank of Japan's more optimistic assessment of the economy. The US 2-year auction went very well despite the paltry 0.75% yield on the notes. Today will feature a $42 billion sale of 5-year notes and tomorrow a $32 billion sale of 7-year notes. Direction in yields are still critical for the JPY and the most critical level to watch is the 200-day moving average on US 10-year notes. The day's lows in yields have coincided with this MA for 5 of the last 6 days. It is interesting to note the yen's appreciation despite the increasing noise level on a potential renewal of quantitative easing-style policies to fight the deepening deflation in Japan. Looking at USDJPY today, we note that USDJPY has only close below the current level (88.60 as we write) on two occasions since 1995. It is also interesting to note that USDJPY volatility, as measured by the ATR, is at a low not seen since the summer of 2007. So if looking for further JPY upside, one might prefer a look at a cross like AUDJPY or NZDJPY for volatility, though those trades will need weaker equity prices to gain significant downside momentum.

Chart: USDJPY

A lot of focus on USDJPY this week. If the pair closes the week at current levels or lower, it would be the lowest weekly close since 1995. These low levels are coinciding with the US 10-year benchmark skating along the key support at the 200-day moving average. A continued sell-off in USDJPY could be precipitated if yields continue to drop from here.

USD JPY

BoE puts us to sleep....

The Bank of England testimony today was not particularly rich with decisive statements on the future monetary policy trajectory. Most of the statements are of the "on the one hand, but on the other" variety. It is clear that the Bank of England is unimpressed with the strength of the recovery (King: "You should expect pretty buoyant growth rates in the short run" (due to severity of economic slump....but "It's actually not a particularly strong recovery."), but is hoping that the announced extent of quantitative easing will suffice, even if it keeps an open mind and is prepared to continue should conditions warrant. King said that policy tightening via an end of QE and traditional interest rate tightening would take place over the next 2-3 years in the imagined scenario of an economic recovery. EURGBP tried to stage a renewed rally, but there was very little to drawn on from this performance as a catalyst for market action. Locally, the 55-day moving average is looking interesting on the close in that pair.

Looking ahead

Interesting to see more strong data out of Switzerland again today and we again wonder if EURCHF is permanently locked in its vice g rip or if the SNB is ready to dip its toes into the free market again. Watch out for the SNB's Roth out speaking later.

The US GDP was revised down as expected - no real surprise there. Consumer confidence is the next focus after last month's ugly reading. Confidence may be waning if we are to believe the latest presidential polls, which show Obama slipping. Later this week and into to the weekend there will be intense focus on the Black Friday (Friday after Thanksgiving) retail activity and the activity over the weekend as a harbinger for the strength of the traditional end-of-year consumption spree by US consumers.