Today’s calendar is busy with UK releasing manufacturing and industrial production figures followed by the BOE rate decision, Germany releases industrial production data, ECB rate decision is the focus today on rate hike speculations. US releases ADP employment data ahead of tomorrow’s Non-farm payroll data, which could determine the expectations of job figures in the US followed by initial jobless claims and oil inventories. Tomorrow is Payroll Friday.
For the Euro, stress continued to play out in the European debt markets yesterday as traders further priced in Portugal’s rating downgrade. EUR came under significant selling pressure falling to 1.4227 and 1.1976 against the USD and CHF respectively. European peripheral yield spreads widened further with Portuguese 10 yrs jumping 180bp. There is a clear feeling that EU policies markets don’t completely comprehend the risk in not providing a new bailout plan – another disturbing signal is their public fighting with the credit rating agencies. Personally, I keep having flash backs the Pixar movie “The Incredibles” when the villain says “oh, you caught me monologing again.” A habit of overconfident villains which allows the hero/heroine to escape.
Instead of the EU providing a short term solution after last week Greek parliament’s austerity vote, they had to squabble over the role of the private sector involvement and issued statements that sound like we won’t see a plan until Autumn. The opportunity has now past and markets are concerned that the civil servants in Brussels don’t fully comprehend what’s at stake. Remember, the European union was created by business leaders and academics and then sold to politicians, so there’s no reason to expect them to fully understand what is needed to maintain the union. While policy risk is developing in Europe, there are further indication that global activity is slowing.
For the CHF, Swiss inflation data was released today. This has the market’s attention right now – especially the jump to 0.6 from 0.4% prior reading. However, when the dust settles, traders will realize that the data is relatively benign given the longevity of the strong Swiss economy (highlighted by booming real-estate sector). I suspect that that the SNB especially, will breathe a sigh of relief, in knowing that inflation didn’t surge higher. Further evidence that inflation pressures were spiraling out of control would demand a response from the central bank. Tightening, in the form of higher interest rates, is exactly what the struggling Swiss export sector does not need. Adding an interest rate kicker to a rallying CHF would be like throwing fuel on a fire, with interest rate differential & safe haven seekers flooding back into CHF. The SNB will feel safe that the recent deceleration in economic data & strong CHF will naturally curb inflation and higher rates will not be needed. Considering today’s read, we still don’t expect the SNB to move until Q1 2012.
On the GBP, the BoE MPC will hold its monetary policy meeting this today, but it is almost certain to be a non-event. Markets are pricing in no change in interest rates at 0.50%, and that the asset purchase target will be left at £200bn. Although headline CPI surged uncomfortably again in April to 4.5% yoy (more than double the 2.0% target), the MPC has been very reluctant to act on inflation expectations with the growth environment looking progressively more unstable (watch this week’s PMI and industrial and manufacturing output releases). As a result, GBP is expected to weaken further as the market’s expectation of further QE increases. The MPC minutes will be significant as investors scan the text for new indications of member’s dovishness, however markets will not get a glimpse until 20th July.
As of late, we’ve received soft economic data (interesting that the lone winner has been the US recently) plus news today that China may hike rates will add further pressure to risk correlated trades. Today’s data points could change the directions and expectations of the market for the summer going forward – keep a keen eye on the news today.
08:15 CHF CPI
09:00 NOK Industrial / manufacturing Production
09:30 GBP Industrial output
09:30 GBP Manufacturing Production
11:00 EUR German Industrial production
12:00 GBP MPC Interest rate decision Last 0.5 Exp 0.5
12:00 GBP Asset purchase decision Last 200 mio Exp 200 mio
12:45 EUR ECB Interest rate decision Last 1.25 Exp 1.50
13:15 USD ADP Employment Last 38K Exp 60K
13:30 EUR ECB Press conference Trichet speaking
13:30 USD Initial Claims Last 429K Exp 425K
17:30 USD Hoenig (FOMC Non-voter) Speaking
The Risk Today: EurUsd Heavy selling pressure continues on the back of Moody downgrade of Portugal and renewed contagion fears. The sharp reversal from 1.4578 high, to below the 1.4484 (bearish downtrend floor) gives this pair a clear bearish tone. The absolute collapse of near term support puts the next support at 1.4277 (intraday low), 1.4103 (27th June low) then 1.4074 (16th June low). Should Trichet’s comments provide a bullish trigger, next resistance should come into play at 1.4348 (intraday high), 1.4467 (6th July high), 1.4578 (4th July high), then a break of 1.4697 (7th June high) then gives scope for a wider move to 1.4940 (4th May high).
GbpUsd The sterlingS choppy trading between 1.5944 and 1.6018 has been keeping traders busy. Strong PMI service reading yesterday gave the cable a push but demand dried up quickly. First resistance stands at 1.6018 (intraday high), 1.6091 (6th July high), 1.6141 (4th July high) then 1.6229 (38.2 Fibo from the sell off 1.6747 to 1.5909). Initial support is located at 1.5944 (7th June low) then minor support at 1.5911 (28th June low), 1.5822 (31st Jan low) then 1.5752 (2th Jan low).
UsdJpy Risk on – Risk off trading is keeping this pair in a 79.70 to 81.30 range. Prior week’s directional move above 80.98 (daily cloud base) failed to hold and we quickly slipped down to 80.31. The pull-back in risk aversion and US yields have been the core driver and at least for yields we don’t see much more near term upside. As for resistance 81.31 (2nd June high), 81.77 (31st May high) should keep upside capped. First support is located at 80.50 (1st July low)) then 80.01 (8th June low & psychological level) then 79.70 (8th June low) and 79.57 (5th May lows).
UsdChf Prior week assault on CHF prior was brutal but selling momentum has cooled and we are see renewed demand. Below 0.8550/54 (16th June high & bear downtrend ceiling) we remain bearish on the USDCHF. Initial support is now located at 0.8364 (29th June high & 6th July low), then 0.8297 (29th June low) and finally 0.8276 (all time lows). Resistance is located at 0.8443 (intraday high), 0.8507 (5th July high), 0.8551/53 (15th & 16th June high) and 0.8695 (long term bearish downtrend ceiling).
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