There seems to be a pendulum swinging around the world lately. Friday saw a vicious and ugly close in the US equity markets that suddenly yielded to yesterday’s mini-meltup in risk appetite and then today we get the pendulum swinging back the other way, with a positive close in the US yielding to a swoon in risk appetite today. EURUSD managed to work its way back through 1.3000, setting up that level as resistance now ahead of the FOMC meeting as it looks like the frame of 1.2800 and 1.3000 will provide the spark for the next bigger move from here. I’ve argued that downside is the greater risk, but seeing is believing now that we’ve been carving out a range for about 6 weeks.
Some support for the downside view came as Spanish and other peripheral bond spreads headed back wider today, to the tune of 16 bps to Germany for Spanish 2-year bonds.
BoC distractionConditions are not at all supportive of CAD, but considerable dovish expectations were built into today’s BoC meeting, so when Carney came out today saying that the next rate move would likely be higher (will he come to eat his words?), the market smacked USDCAD back lower after it was within reach of parity shortly before the meeting. 2-year Canadian rates jumped about 6 bps, etc., but before we all start piling into CAD again, we might throw a glance over at the scary WTI crude oil chart, which suggests USDCAD should be closer to 1.05 than 0.9900 as crude prices dipped below 87 dollars a barrel today. The next couple of days are likely to see us either catapulting above parity or breaking back below the 0.9900/0.9880 support which could set up a fresh bout of wallowing in the range.
Tough to unravel the JPYThe JPY was sharply weaker after the blowout trade deficit number for September that will likely be followed up by a far worse October number since a key driver for the deficit was popular Chinese protest over the small islands dispute – a dispute that started a couple of weeks into September. But today shows how difficult it is for the JPY to weaken when the major bond markets are finding support and commodities and equities are haemorrhaging. I think JPY will remain tricky to play here, let’s look for signs of support in USDJPY in the days ahead and then a break and hold of 80.00 before we begin to believe in the longer term USDJPY upside story (I believe in it, with little confidence in timing it.
With the FOMC meeting up tomorrow (I’m hardly expecting any developments of interest from the monetary policy statement – but the market may “react” simply by having this key event risk out of the way.) It is interesting to note the USD strength today taking out a few initial key levels, like 1.3000 in EURUSD and the support in AUDUSD I mentioned in this morning’s chart. I am working on a breakdown of the major FOMC events this year by asset class. Hope to have something interesting to discuss on this tomorrow – though I think each event must often be taken in its individual context.
Tonight in the Asian session, we have the flash HSBC Chinese PMI for October. Tomorrow we have the German IFO for October and the flash PMI’s for Europe and Germany for both Manufacturing and Services industries followed by the FOMC meeting/monetary policy statement release. There is no Bernanke press conference scheduled.
Economic Data Highlights
- Japan Oct. Small Business Confidence survey out at 43.7 vs. 45.1 in Sep.
- UK Sep. BBA Loans for House Purchase out at 31,175 vs. 30,840 expected and 30,683 in Aug.
- Canada Aug. Retail Sales out at +0.3% MoM and less Autos at +0.4% MoM, both as expected.
- Canada Bank of Canada leaves rate unchanged at 1.00% as expected
Upcoming Economic Calendar Highlights (all times GMT)
- US Oct. Richmond Fed Manufacturing Index (1400)
- UK BoE’s King to Speak (1900)
- US Weekly API Crude Oil and Product Inventories (2030)
- Australia Q3 Consumer Prices (0030)
- China Oct. HSBC Flash Manufacturing PMI (0145)
- Australia RBA’s Ellis to Speak (0230)