Has EUR/USD Traded Too Far?
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The Regular Update from The Mole and paddypowertrader.
The Financial Markets - 3 June 09
A day of consolidation for stocks, while pending homes sales data, was a shade better than the lowly expectations (as record highs in affordability lured buyers) and the autos sales numbers were tad less awful than the markets were bracing for. The disappointment was again from the unwillingness of financials to partake in the up move after stock offerings to repay the TARP.
Though the financial component of the S&P 500 has shrunk to just 11%, banks still serve as the lifeblood of American business. Without the lending component most US corporations would struggle to grow and finance their day to day operations. The banks have run into an interesting point of resistance at their 200 day moving average. While investors hail the S&P’s surge above this critical point the banks and housing stocks appear to have hit a road speed bump. Sheep dressed as bears
Today’s Market Moving Stories:
- There was an upside surprise in Australian GDP, Q1: driven by somewhat implausible strength in export volumes kept GDP in the black, rising by 0.4%, although nominal GDP shrank at a faster rate. It seems that the aussies avoided the great recession
- There were conflicting signals from consumer confidence reports from either side of the Atlantic overnight, with the ABC index in the US, slipping from -47 to -49 last week, the third successive decline from -42 in a slide almost as precipitous as that seen in the wake of the collapse of Lehmans at the end of Sep 08. In the UK on the other hand, the Nationwide index reported a second successive monthly rise from 51 to 53, the highest reading since Nov 08.
- Also in the UK, there are no signs that the political turmoil that is growing worse by the day is impacting negatively on sentiment, though the outcome of the European and local elections tomorrow could shorten the odds on an early General Election.
- N. Korea is preparing to assemble a long range missile for launch as early as this month according to media Reports The JoongAng Ilbo quotes a South Korean government source as saying: “The ICBM is covered up so it’s tough to be absolutely clear but it looks similar to the Taepodong-2 fired in April but longer.” The newspaper says the missile has been moved to a hangar for assembly at the newly built west coast Tongchang-ri missile range for a launch that could come as early as mid-June.
Are there more signs of tensions within the ECB overnight?
ECB council member Nowotny wrote in a letter last week that “through the purchase of bonds or other commercial papers, the yield curve can be flattened, thereby lowering long-term interest rates, which are decisive for investment”, Bloomberg reports. The Austrian central bank confirmed the comment but said it “should be understood in an academic context”. Separately officials at the European Securitisation Forum are calling on the ECB to start a program similar to the Fed’s TALF, the WSJ reports.
Eurozone PMIs & Q1 GDP (prelim) today will provide a fresh look at evidence of a stabilisation in the economic backdrop; coming from such a low base it is still too early to talk of the ‘V’ shaped recovery suggested by some. Ahead of tomorrow’s ECB meeting, comments by Chancellor Merkel suggest there are significant differences of opinion within the Council . Diverging opinion at the ECB. Germany and Austria have broadcast potentially conflicting opinions ahead of tomorrow’s ECB meeting. Nowotny (see above) has expressed the view that the ECB should do more and expand Quantitative Easing beyond the €60bn already announced for Covered Bonds. Weber is seeking to put a limit on the plan, a stance that has been backed by Chancellor Merkel yesterday, in a speech which stated the ECB ‘bowed somewhat to international pressure’ & that she views ‘with great scepticism’ BoE & Fed policy.
Here are some interesting developments, though they were not decisive market movers yesterday: Paul Volcker has warned that the economic recovery is “years away”. He tackles some macro issues that rank prominently in our fresh Bond Outlook. Volcker worries about the growing US debt, saying the nation has long been spending beyond its means. The US faces “an unimaginable budget deficit as far as one can see. Foreign countries have been for a long while willing to finance our excess spending, but that process can’t continue forever.”
We also note that Russia’s President Medvedev has warned that “the world needs more reserve currencies
Greenshoot Spotting
Remember the Baltic Dry index, the benchmark freight transportation index, whose extraordinary decline last year gave us a good indication of the depth of the global economic crisis? The BDI jumped 11.6% on Tuesday, to over 4100 points, its 22nd consecutive day of gains, following by a big increase in the number of ships waiting at ports in China and Australia, according to the Financial Times.
The On / Off Shotgun Marriage at Elan
Talks between Elan and Bristol-Myres Squibb are said to have taken place last month but broke down at an early stage according to news reports last night. The talks were said to be preliminary in nature and the issue of price was never discussed. The reports are unclear as to whether talks could resume at a later date. Earlier in the week it had been suggested that talks were further along and had been complicated by issues surrounding price and Elans drug partnerships. This is now being refuted. Elan would be seen by many as a good strategic fit for Bristol-Myers strategy of boosting revenues through acquisitions of drug companies in the $1 billion to $2 billion range. Bristol-Myers see new deals as vital to growth as it is set to lose patent on its biggest drug, Plavix in 2011.
The American Peso
The discussion about the creation of a supranational currency for international reserves by a Russian spokesman should weigh on the USD until the BRICS Summit in Russia on 16 June. Repatriation of foreign profits by Japanese companies (ie, the Japanese version of the 2005 US Homeland Investment Act) may support the JPY. The Nikkei reported that Hoya, a tech manufacturer, plans to repatriate the pooled profits in its European subsidiary worth Y120bn back to Japan during this fiscal year ending March. It is estimated that the total repatriation may be up to Y10trillion in the coming years (there is no deadline for repatriation, as was the case in the US HIA). The currencies to be converted to JPY will be mostly denominated in USD and EUR.
Momentous momentum. The Trend is your friend
So the adage in markets regarding momentum is typically “don’t stand in front of a moving train”, but the pace of the shift in the market’s attitude towards the USD begs the questions who is driving the train and are there many people aboard? Ahead of this move, my view would have us firmly in the camp of strident USD bears, with a far more aggressive profile for a USD sell-off than was envisaged by the consensus. Now, I face a spot market that is rapidly approaching, or in some instances has already surpassed, our year-end 2009 expectations and find myself increasingly making the case that things have moved too far. Surely the USD will make a stand at key levels like $1.4370 ?
Yet the dangers posed by that train remain, not only in terms of being hit by it, but also a sense that there may yet be a few more late passengers who will want to clamber aboard.
The problem for the USD bears from this point is that the weakness is extending beyond levels consistent with equity market behaviour. The weakness evident in the USD, driven initially by rising risk appetite, has now morphed into a momentum play and has allowed other bearish-USD stories to gain increased traction in the market.
For example, the rise in Treasury yields continues, simplistically, to support the concept that foreign appetite for US assets is set to wane even if custody holdings and indirect bids data provide compelling evidence of the exact opposite. The market frets about comments from Russia that the BRIC conference will include discussion of a supra-national world currency, while skimming over the more directly relevant observations from China that the USD will remain the main reserve currency. This selectiveness and spin can sustain the momentum, but it opens up a gap between the blinkered mood and the more mixed reality which can reverse.
For now, however, one has to acknowledge that being short of USD has not been a painful or difficult position to hold in recent days, with the pull-backs generally small and not especially potent. So long as this asymmetry persists, so can that gap between mood and reality.
But if this USD slide extends, as seems likely, it cannot be too long before we get a counter-offensive in terms of spin. Economies are still struggling, and how many of them will welcome their local currency’s strength?
For example, it is only that we saw 1.60 on EUR/USD last year that the current level of 1.43 does not feel overly onerous, but bear in mind that the average level for this exchange rate since inception has been1.14.The German manufacturing export sector, already struggling, will eye the EUR gains warily even if the trade-weighted does not look too horrific. How long also until we read of the threat to the global recovery from the sharp rally in commodities driven by economic optimism and USD weakness?
Data Ahead Today
- Data begins today with May services PMI concluding with the Eurozone number at 09:00.
- We also get Q2 GDP figures as well as April PPI numbers.
- From the UK we get the May CIPS survey official reserves and the BRC shop price index.
- From the US today we have MBA mortgage applications at noon.
- Challenger job cuts come in at 12.30.
- ADP employment change 13.15 (-525k)
- ISM non-manufacturing (45) at 15.00
- Factory Orders numbers (0.9%) both at 15.00
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"Has EUR/USD Traded Too Far?" last update by The Mole, 03-Jun-2009
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