Yen Roars back into favor
Last week’s currency trading review
The Dollar was mixed to stronger against most currencies except the Yen which took back all of Non Farm Payrolls gains during the week. Data was a lot weaker than expected with US retail Sales down -0.1% vs. 0.8% forecast and August UoM Consumer Confidence slumping to 63.2 vs. 68.5 forecast. The Fed Meeting was a non event with a slight improvement in economic outlook being countered by a slight extension of the Treasury buying program with the net result neutral for the Dollar. The Euro was volatile as the USD strength story falling apart given the US retail sales disappointment on the same day the German and French GDP turned positive. Stock weakness on Friday pressured the pair onto the back foot with heavy EUR/JPY selling clouding the outlook. The EUR/USD gained 0.14% closing at 1.4202, after opening the week at 1.4181.
The Japanese Yen saw nothing but strength for nearly the whole week as US data underperformed and a series of heavy losses on the Shanghai Stock Index forced the USD/JPY back to below 95. AUD/JPY was also hit hard as the markets risk barometer slid 3%. CAD/JPY lower on the commodity slump fell 4%. The USD/JPY closed down -2.78% at 94.91 after opening the week at 97.55. The GBP continued on the downside slide that began last week with risk aversion and GBP/JPY dragging the pair towards 1.6400 supports. The BOE Inflation report was bearish as forecast although the pound did find support as the pull back from 1.7000 entered oversold territory. RICS House Balance improved to -8 from -17 in July. GBP/USD fell -0.86% closing at 1.6540 after opening at 1.6683. The AUD slumped with stocks after heavy AUD/JPY selling hit the markets on Friday Night. Earlier in the day fresh Year highs were seen on the back of RBA governor Stevens speaking about the need for rate rises as soon as conditions normalize. NAB Business Confidence rose to 10 from 4 previously and Consumer Confidence rallies another 3.7% in August. The AUD/USD closed down -1.27% at 0.8325 after opening at 0.8431.
Thursday, August 20, 2009
FX Market Update - AUD softer overnight
August 14th, 2009
Given the market’s focus on Reserve Bank of Australia Governor Stevens’ comments overnight – which boosted expectations that Australian interest rates are very unlikely to fall further and may well rise before the end of this year if the economy holds up – the AUD’s relative softness (its is the second worst performing currency on the session so far overall versus the USD) looks a little odd; the AUD did make a new marginal new high for the current move up (highest spot level since September 2008) initially on the remarks but the rally stalled below 0.85 (and high/low resistance just above at 0.8515). A sharp fall in Chinese stocks has perhaps overshadowed RBA policy prospects to some degree and tempered risk-seeking plays for the moment.
While the market has started to price in sharp rate increases for Australia over the course of the next year, note that in real terms, yield spreads are not an obvious draw for any of the major currencies, with real yields currently clustered in the 1-2% range and, for the most part among the major currencies, largely moving in synch. That might not stop investors from continuing to push the AUD higher moving forward – despite today’s softness, the AUD has performed well on the week – but it is perhaps telling that the JPY has been the strongest currency on the session so far, suggesting little or no interest to bump up carry trade exposure today purely on the back of the rather hawkish RBA comments. This might just reflect short term positioning but the JPY looks in a good position to extend this week’s gains versus the USD; technically, USD/JPY is poised to put in a big weekly reversal and next week, a heavy round of US government coupon payments and bond redemptions (estimates of up to USD80 bn) suggest some flows back to Japan given larger institutional investors’ bias to reduce exposure to US Treasury debt. The Nikkei reports today that larger Japanese exporters – electronics and auto makers – are reducing their own internal assumptions for USD/JPY for the current quarter. Short JPY positions may be facing a bit of a squeeze in the next few days if the technical signals and potential redemption-related flows are any guide.
Given the market’s focus on Reserve Bank of Australia Governor Stevens’ comments overnight – which boosted expectations that Australian interest rates are very unlikely to fall further and may well rise before the end of this year if the economy holds up – the AUD’s relative softness (its is the second worst performing currency on the session so far overall versus the USD) looks a little odd; the AUD did make a new marginal new high for the current move up (highest spot level since September 2008) initially on the remarks but the rally stalled below 0.85 (and high/low resistance just above at 0.8515). A sharp fall in Chinese stocks has perhaps overshadowed RBA policy prospects to some degree and tempered risk-seeking plays for the moment.
While the market has started to price in sharp rate increases for Australia over the course of the next year, note that in real terms, yield spreads are not an obvious draw for any of the major currencies, with real yields currently clustered in the 1-2% range and, for the most part among the major currencies, largely moving in synch. That might not stop investors from continuing to push the AUD higher moving forward – despite today’s softness, the AUD has performed well on the week – but it is perhaps telling that the JPY has been the strongest currency on the session so far, suggesting little or no interest to bump up carry trade exposure today purely on the back of the rather hawkish RBA comments. This might just reflect short term positioning but the JPY looks in a good position to extend this week’s gains versus the USD; technically, USD/JPY is poised to put in a big weekly reversal and next week, a heavy round of US government coupon payments and bond redemptions (estimates of up to USD80 bn) suggest some flows back to Japan given larger institutional investors’ bias to reduce exposure to US Treasury debt. The Nikkei reports today that larger Japanese exporters – electronics and auto makers – are reducing their own internal assumptions for USD/JPY for the current quarter. Short JPY positions may be facing a bit of a squeeze in the next few days if the technical signals and potential redemption-related flows are any guide.
Wednesday, August 12, 2009
Market Event Risk - FOMC Interest Rate Decision (August): 11 August 2009
August 11th, 2009
The next instalment of the Federal Open Market Committee (FOMC) interest rate decision will be delivered on August 12. However, as has been the case in the past, with the Fed explicitly committing itself to keeping interest rates “exceptionally low” for an extended period of time, the actual interest rate announcement is unlikely to attract much attention. Instead, the focus will undoubtedly be on the tone and content of the statement. In terms of the economic and inflation outlook, analysts expect the economic assessment to perhaps offer some acknowledgement of the improvement in the economic outlook, and maybe note that the economy may be stabilising, despite the continued weakness in the labour market. The inflation outlook is likely to remain virtually intact. In terms of the Fed’s monetary policy stance, this meeting is likely to be pivotal for the FOMC, as the Fed will likely decide on whether to increase the size of its Treasury purchase program given that the allocated funds for the program will likely be exhausted before the next meeting.
Foreign Exchange: The biggest issue for the currency markets is whether the Fed pulls a surprise like the Bank of England last week and unexpectedly pumps up its asset purchases. However, that’s unlikely to be the case as the Fed has some ways to go with its Treasury purchases, and has an even longer way to go when factoring in its total asset purchase plans, so there’s no need at this point to make any changes. The second issue will be the tone of the statement, which should be a little more positive than that last as we’ve seen further improvement (or at least less deterioration) in the weeks since the last FOMC meeting. But with unchanged asset purchases being USD-supportive and a more optimistic tone being USD-negative (assuming the risk-on/USD-negative relationship continues to hold), there may not be much net USD reaction.
Fixed Income: The Fed rate decision should trump all other economic releases tomorrow, and one continues to highlight the risk of a bond bearish outcome. This is motivated by several factors. First, the bond market has sold off after the prior two Fed decisions. Second, it’s expected that the economic and credit assessment to be notably improved. Third, the Treasury purchase plan is unlikely to be extended despite recent Bank of England precedent to the contrary, and based upon the fumbling of an announcement today, there is at least a slim chance that the Treasury purchase plan could be halted altogether effective tomorrow (this is highly speculative, but worth noting since it would prompt a sharp bond selloff) The only thing tempering this view is that no exit strategy should be offered given that it has already been discussed ad nauseum in other forums. Still, the overall assessment is that Treasuries should sell off in response to this report.
The next instalment of the Federal Open Market Committee (FOMC) interest rate decision will be delivered on August 12. However, as has been the case in the past, with the Fed explicitly committing itself to keeping interest rates “exceptionally low” for an extended period of time, the actual interest rate announcement is unlikely to attract much attention. Instead, the focus will undoubtedly be on the tone and content of the statement. In terms of the economic and inflation outlook, analysts expect the economic assessment to perhaps offer some acknowledgement of the improvement in the economic outlook, and maybe note that the economy may be stabilising, despite the continued weakness in the labour market. The inflation outlook is likely to remain virtually intact. In terms of the Fed’s monetary policy stance, this meeting is likely to be pivotal for the FOMC, as the Fed will likely decide on whether to increase the size of its Treasury purchase program given that the allocated funds for the program will likely be exhausted before the next meeting.
Foreign Exchange: The biggest issue for the currency markets is whether the Fed pulls a surprise like the Bank of England last week and unexpectedly pumps up its asset purchases. However, that’s unlikely to be the case as the Fed has some ways to go with its Treasury purchases, and has an even longer way to go when factoring in its total asset purchase plans, so there’s no need at this point to make any changes. The second issue will be the tone of the statement, which should be a little more positive than that last as we’ve seen further improvement (or at least less deterioration) in the weeks since the last FOMC meeting. But with unchanged asset purchases being USD-supportive and a more optimistic tone being USD-negative (assuming the risk-on/USD-negative relationship continues to hold), there may not be much net USD reaction.
Fixed Income: The Fed rate decision should trump all other economic releases tomorrow, and one continues to highlight the risk of a bond bearish outcome. This is motivated by several factors. First, the bond market has sold off after the prior two Fed decisions. Second, it’s expected that the economic and credit assessment to be notably improved. Third, the Treasury purchase plan is unlikely to be extended despite recent Bank of England precedent to the contrary, and based upon the fumbling of an announcement today, there is at least a slim chance that the Treasury purchase plan could be halted altogether effective tomorrow (this is highly speculative, but worth noting since it would prompt a sharp bond selloff) The only thing tempering this view is that no exit strategy should be offered given that it has already been discussed ad nauseum in other forums. Still, the overall assessment is that Treasuries should sell off in response to this report.
USD/CAD Morning Comments
August 12th, 2009
Comments from Canadian officials earlier today in China have not had much impact on the CAD. Finance Minister Flaherty said that the government “has always expressed concerns with respect to rapid fluctuations” in the CAD but in discussions with Chinese officials, both parties agreed that international currency issues should “take a back seat” until the global economy was back on its feet. While that might give the impression of downplaying Canada’s recent concerns about currencies, it perhaps suggests more accurately that policy makers will continue to focus on currency issues as they relate to domestic – rather than international – considerations; China can maintain its CNY policy and Canada can still fire off the odd verbal shots at the FX markets if the CAD gets too strong. For the moment, the recent run up in the CAD appears to have turned and although the CAD has softened in the past week or so more or less as quickly as it appreciated in late July, this sort of “rapid (downward) fluctuation” is unlikely to attract the attention of local policy makers. Concerns that the global recovery could stall (Asian equities fell in overnight trade, though Europe has held up relatively well) have trimmed commodity prices a little in the past few days and that has helped trim appetite for the CAD though some still think the CAD looks fundamentally attractive (structurally sounder economy, financial system more robust) and some expect losses to remain limited in the short term and for the CAD to continue to appreciate in the medium term. Trade data may provide a little support for the CAD – the market is looking for a modest narrowing in June over the May deficit but the risk is for a very small surplus. The important short term support for USD/CAD is at 1.0990/1.1010 – below here and we should see USD/CAD drop back quite quickly – while there is a band of short, medium and long term resistance above the 1.11 level, suggesting that modest CAD losses from here should represent a decent risk/reward medium term buying opportunity.
Comments from Canadian officials earlier today in China have not had much impact on the CAD. Finance Minister Flaherty said that the government “has always expressed concerns with respect to rapid fluctuations” in the CAD but in discussions with Chinese officials, both parties agreed that international currency issues should “take a back seat” until the global economy was back on its feet. While that might give the impression of downplaying Canada’s recent concerns about currencies, it perhaps suggests more accurately that policy makers will continue to focus on currency issues as they relate to domestic – rather than international – considerations; China can maintain its CNY policy and Canada can still fire off the odd verbal shots at the FX markets if the CAD gets too strong. For the moment, the recent run up in the CAD appears to have turned and although the CAD has softened in the past week or so more or less as quickly as it appreciated in late July, this sort of “rapid (downward) fluctuation” is unlikely to attract the attention of local policy makers. Concerns that the global recovery could stall (Asian equities fell in overnight trade, though Europe has held up relatively well) have trimmed commodity prices a little in the past few days and that has helped trim appetite for the CAD though some still think the CAD looks fundamentally attractive (structurally sounder economy, financial system more robust) and some expect losses to remain limited in the short term and for the CAD to continue to appreciate in the medium term. Trade data may provide a little support for the CAD – the market is looking for a modest narrowing in June over the May deficit but the risk is for a very small surplus. The important short term support for USD/CAD is at 1.0990/1.1010 – below here and we should see USD/CAD drop back quite quickly – while there is a band of short, medium and long term resistance above the 1.11 level, suggesting that modest CAD losses from here should represent a decent risk/reward medium term buying opportunity.
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