Here’s some tips on how to navigate in the foreign exchange market the coming week in the aftermath of the Irish bailout drama. Reports and analysis from Saxo Bank, DnB NOR Markets and others.
“EUR gapped higher as trading kicked off but then hovers in Asia; S&P cuts New Zealand’s outlook to negative.”
Andrew Timothy Robinson
“We started the week off slowly in Asia with only minor data to whet the appetite. The European session is also quiet with Swiss money supply the only release while the US session has the Chicago FED Index and a late euro zone consumer confidence to cope with,” Saxo Bank’s FX spesialist Andrew Robinson writes.
In weekend developments, Ireland bowed to EU pressure and requested a bailout package and its related conditions.
“Initial announcements suggest a bailout to the tune of €80-90 bln with a 4-year plan to reduce the budget deficit by 2015. The final rate is still being negotiated but will certainly be better rate than currently available in the markets,” Robinson at Saxo Bank ponts out.
Adding: “The response from G7 finance ministers was positive, saying “The coordinated action of European countries and the IMF reflects our shared resolve to act swiftly and decisively to mitigate emerging risks, maintain market stability, and safeguard the global recovery”.
The initial reaction saw the EUR open 40-50 ticks higher in Asia from the NY close though other risk pairs failed to catch the wave to the same degree.
Asia struggled to press on with the gains with a Tokyo holiday tomorrow curtailing trading interest.
In addition the US Thanksgiving holiday on Thursday tempered interest.
“The Thanksgiving holiday causes most of the data activity to be bunched into the first half of the week – but not today,” Andrew Robinson writes.
Andrew Robinson
“Midway through the session ratings agency S&P announced it was switching its outlook for New Zealand’s foreign currency rating, and those of 6 related agencies, back to negative. The agency said the outlook revision reflected its recognition of the risks stemming from New Zealand’s projected widening external imbalances in the context of the country’s weakened fiscal flexibility while the vulnerability to external shocks, arising from its open and relatively undiversified economy, also raised risks to the country’s economic recovery and credit quality.”
However, a range of factors ameliorates some of these risks, the agency added, including a high degree of foreign-currency-debt hedging and an actively traded currency.
“New Zealand has independent and effective monetary policy settings with a highly traded and free-floating currency that allows external imbalances to adjust. Despite this, NZD tumbled one big figure versus the dollar and was weaker on most crosses.”
Here’s a copy of Monday’s FX report by Saxo Bank.
Oversold Euro
From today’s Gartman Letter:
“Note then the chart of the EUR vs. the US dollar in hourly terms at the upper left this page. The fact that the EUR made its low last Tuesday at or near 1.3540 and that it has rallied all the way to 1.3750 is impressive, taking the EUR from having been rather egregiously over-sold to the point where it is not modestly overbought. We’ve noted again the 50-62% retracement region… the area we call “The Box” … of the bearish move against the EUR that took the EUR from 1.4250 to 1.3450. The market has some way yet to rally just to get to “The Box” and so we shall not be surprised to see it rally a bit more in the course of the next few days. However, our propensity shall be to sell that strength rather than buying weakness. We’ll wait, however, until the EUR rallies back to The Box before taking such action. We can and we will be patient,”
Here’s a copy of the full analysis.
THE WATCHLIST – UPCOMING SESSION:
- Swiss M3 Money Supply (0800)
- Denmark Consumer Confidence (0830)
- HK CPI (0830)
- US Chicago Fed Nat. Activity Index (1330)
- EU Euro-zone Consumer Confidence (1500)
- US Fed’s Kocherlakota to speak (1830)
(All Times GMT)
DnB NOR Markets, Weekly Update, Foreign Exchange Market. 11222010.
DnB NOR Markets. Weekly Update. Scandinavian Macro. 11222010.
Saxo Bank. Wake-up Call. 11222010.
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- Ireland Applies For Bailout – IMF Plans Dramatic Spending Cuts
- Quiet Before The Credit (Card) Storm?
- Credits: Remember Me?
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Related Articles:
- FOREX-Ireland’s rescue deal lifts euro, Aussie gains (reuters.com)
- S&P Shifts Outlook for New Zealand (online.wsj.com)
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“Both we and consensus expect the interest rate to be left on hold at this meeting,” Ms. Viland writes.
No Hope For The Dollar?
A very ugly batch of data today from the US, particularly the new spike in jobless claims, will have the market cooking up fresh imaginings of QE to infinity. Here’s a fresh update from Saxo Bank.
“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 market wasn’t particularly well positioned for this and the NZD was weaker across the board – even against the US dollar relative to yesterday’s levels.”
NZD/USD:
“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:
John J. Hardy
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.
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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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