“At some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets.”
John J. Hardy
It’s a perfectly timed question, as the USD struggle to recover from a three-year low, and the US FED signals zero interest rate practically forever if necessary. So, what does Thursday’s data mean for risk appetite and for the USD – could it be slightly supportive in the near term, or is there simply no hope for the greenback?
“Remember in our look at the last couple of FOMC meetings, that the pattern we saw in both rates and in the USD. Those meetings produced a short additional weakening in an already weak USD, followed by a period of consolidation. So far, the pattern is holding,” FX strategist John J. Hardy writes in an update.
Adding: “This time around, Bernanke did all he could to make us all want to run out and buy survival supplies and alternative investments with every greenback we could scrounge up. The question is what percentage of the market has waited until this point to get short of the USD, considering the very stretched move we have seen up to this point. In the nearest term, in other words, there could be more risk of a two-way market developing as long as the market’s largest participants (central banks and others) don’t press the panic button.”
A Disorderly Demise of the Dollar?
But beyond the immediate term, we have to wonder, Saxo Bank concludes.
“As our Chief Economist pointed out in a column this morning, whether this latest performance from Bernanke and company raises the risk of a true USD crisis rather than just a USD slide. While this game of everything up versus the greenback has so far been a relatively risk benign development – at some point, it becomes a very fearsome thing to contemplate a disorderly demise of the world’s reserve currency and what that could mean for the world’s markets,” Hardy writes.
Odds and ends
It is increasingly clear from the stream of data from Japan that the economy took a very serious hit.
The overall household spending level for March was out overnight at -8.5% YoY and the Industrial Production figure for the month was down a stunning -15.3% MoM.
These data only include the effects of the first three weeks of the crisis.
“The market may be willing to give the country some leeway and wait for the May numbers to see how well things are bouncing back, but until then, the sheer magnitude of the fallout is frightening. Meanwhile, the push and pull of the bond rally (JPY supportive) and the worry over sovereign debt levels (JPY negative) is seeing plenty of churning in JPY crosses,” Saxo Bank notes.
Just More Trouble
New Zealand’s RBNZ threw the market a surprise in stating that it expected the cash rate level would be “appropriate for some time”, as it noted that the “outlook for the New Zealand economy remains very uncertain following February’s Christchurch earthquake”.
“The 80 level is also a psychological barrier for the market. But look how far we have come over the last several weeks – it would take quite some doing to reverse the trend. If 80 fails on the close today, we may have to shift the focus to support a bit further to the south,” John Hardy points out.
Very Ugly and Downright Awful
A significant bite was taken out of the pound’s rally against the USD overnight on the release of a very ugly GfK confidence survey, which showed a strong dip to -31, the lowest level since early 2009.
“The UK is in a very similar boat as the US – though the UK government at least taking a step in the direction of austerity while US politicians are divided on even inconsequential budget moves still seems to be giving sterling a premium. But eventually, a sovereign debt crisis theme could weigh as heavily on the pound as well,” Saxo Bank comments.
Today’s US jobless claims data was downright awful.
“We can always toss the GDP data out the window as yesterday’s news, but the weakness is still remarkable considering the massive support from the FED and from the Obama stimulus that provided a strong tailwind from the turn of the year. But the weekly initial jobless claims number has to make us all uncomfortable with the prospects for the US job market, as this week’s claims are the highest since January and now we have three 400k+ readings in a row,” Hardy writes.
Looking Ahead (Trying)
“As US long treasuries are rallying to new local highs (lows in yield) today in the wake of the weak US data, we have a 7-year US treasury auction that offers another test of demand for treasuries, which still appears rather robust at the moment (a phenomenon that continues to stick out like a sore thumb considering developments in other markets, perhaps reflecting the increasing signs of a weakening in the US economy, not to mention the background excuse of FED buying, though it’s important to remember that treasuries sold off consistently for a long time once QE2 became a reality).”
Yesterday’s 5-year auction saw results in line with recent averages despite the uncertainty of the FOMC proceedings that took place in the auction’s wake.
“Could a strong bond market and a weakening risk appetite today pummel some of the pro-risk JPY crosses? Also – is the ugly US data USD bearish because of an increased likelihood the market prices in of QE3+ or is it USD supportive for a little while considering how far we have already come and due to the potential for some risk aversion?” Hardy writes.
And perhaps the most valuable trading tips of today:
“Be careful out there – volatility potential is higher than ever. Don’t forget that tomorrow is the last trading day of the month and could therefore see strong end-of-the month fixing flows.”
John J. Hardy is Consulting FX Strategist for Saxo Bank.
John has developed a broad following from his popular and often quoted daily Forex Market Update column, received by Saxo Bank clients and partners, the press and sales traders.
Read also: Saxo FX Monthly April 2011.
By the way, here’s Saxo’s latest update on equities:
“The first quarter earnings season continues in a strong way – with 224 S&P 500 companies having reported so far and 77% of these having surprised to the upside. Peter Garnry, Equity Strategist, Saxo Bank takes a look at some of the strong performers across a few sectors. He discusses the earnings from Amazon and UPS, which are both benefiting from more consumers buying products on line, plus European banks which are now well into their quarterly reporting but are struggling more than their U.S. counterparts. He also comments on automakers like Ford Motor which reported its best earnings since 1998 and a possible sales boost for U.S. and European car makers collectively due to the post earthquake production and supply struggles of their Japanese competitors. Volvo is also mentioned in terms of an emerging heavy vehcile replacement cycle.”
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- ForexLive Asian market open: USD and JPY take a bashing (forexlive.com)
- FX Update: JPY and CHF falter ahead of FOMC (tradingfloor.com)
- FOREX & Fed Fun (fx4x.wordpress.com)
- Vietnam: State Bank does good job of stabilizing currency market (currencynewshound.wordpress.com)
- Monetary policy in a time of natural disaster (ftalphaville.ft.com)
- Euro falls 1 pct vs dollar, NZD at near 2-month low (reuters.com)