FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day The weekend’s events in Europe completely overshadowed a threadbare slate of data releases and the unanimously expected BoE announcement of an unchanged bank rate and stock of asset purchases. Financial markets were buoyant in the aftermath of the measures announced by the EU over the weekend. US and European stocks have rallied strongly led by the Spanish IBEX which is up over 14% from Friday’s close, while US equities are trading 4.4% higher in the late afternoon. Meanwhile, Greek 10yr yields over Germany have narrowed by over 480bps. High beta currencies have surged, led by BRL and MXN.

However, surprisingly the short squeeze, which saw EUR.USD push through 1.30 in the European session, ran out of steam over the course of the day, leaving EUR/USD only modestly above Friday’s close. While the EU/ECB/IMF has provided a backstop for Greece and other peripheral Euro area countries, significant uncertainties still surround the eventual structure of the European Stabilization Mechanism and the legislative ratification by national parliaments. Further out, the announced ECB measures, while not Quantitative Easing in its purest sense (as seen in the UK and the US), should drive an expansion in ECB liquidity. This in our view is likely to reinforce EUR use as a funding currency. As a result, we see EUR/USD in a range between the low 1.30s and about 1.25 into the summer months as capital flows tend to favour the EUR in recoveries. We are more comfortable in the view that the high beta currencies (particularly EM FX) will be the major beneficiaries of latest developments.

A heavy load of Chinese data releases should monopolize markets’ attention during the Asian session. Strong growth in IP, retail sales and fixed asset investment, along with accelerating PPI inflation should buoy high-beta FX while hammering home the need for a shift toward gradual CNY appreciation and possibly higher policy rates. Overnight news GBP: The MPC left the bank rate at 0.5% and will maintain stock of asset purchases financed by the issuance of central bank reserves at £200 billion, as expected. CAD: April housing starts a touch softer than expected at a 201.7K annual rate. EUR: Risk markets bounce sharply in the aftermath of the EU decision over the weekend. Stocks are markedly higher whilst 10yr bond spreads and 5yr CDS for the Southern Med countries tighten significantly. Bundesbank confirms that it has started to buy government bonds. NOK: Inflation is stronger than expected, with underlying CPI rising 0.3% m/m. PLN: Fin. Min. said that the extension of FCL with IMF will help PLN in the market turmoil. RON: Government and IMF agreed on a budget deficit target for 2010 of 6.8% of GDP, up from the previous target of 5.9%. IMM: IMM longs in USD surged to a record high $19.1bn from $11.4bn in the previous week; EUR shorts continued to expand to the largest ever $16.5bn from $14.8bn in the preceding week while JPY shorts also expanded to almost $9bn from $6.6bn. Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York) NZD: Apr credit card spending (%m/m, sa) @ 23:45 (Prev: 2.1) GBP: April RICS house price survey (%bal, sa) @ 00:01 (JPM: 3.0, Cons: 12.0); April BRC retail survey (%oya) @ 00:01 (JPM: 3.2, Prev: 9.0) AUD: Apr NAB business confidence (%bal, sa) @ 02:30 (Prev: 16.0); 2010-11 Federal Budget @ 10:30 CNY: Apr CPI (%oya) @ 03:00 (JPM: 2.8, Cons: 2.7); Apr PPI (%oya) @ 03:00 (JPM: 6.7, Cons: 6.5); Apr Retail sales (%oya) @ 03:00 (JPM: 18.0, Cons: 18.7); Apr Industrial production (%oya) @ 03:00 (JPM: 18.5, Cons: 18.5); Apr Fixed asset investment (ytd, %oya) @ 03:00 (JPM: 26.2, Cons: 26.0) Overnight price action FX: EUR gives up most of the ground gained in the overnight rally. High-beta FX remains firm but generally off the early morning highs. FX vol: FX option volatility continued to drift lower, with VXY G7 down 1.31 bp. Commodities: Energy traded 2.5%+ higher across the board while gold and base metals slipped. Bonds: Greek 10-year yield spread over Bunds collapsed 483bp overnight, while the yields on US Treasuries, Bunds and other lower-risk government bond yields jump across the board. Equities: Equities rallied powerfully in Europe and the Americas, led by a 14.4% surge in Spain. Technical View for the day The bullish shift in risk continued to develop yesterday following the EU/ECB/IMF initiatives. Importantly, the break above the key 1150/1160 resistance zone for the S&P amid strong breadth highlights the improved risk backdrop while suggesting additional upside is likely to develop. As such, yesterday’s bullish action is likely to extend beyond any near retracement that may develop particularly for high beta. Still, the pullback during the NY session suggests that this recovery faces key hurdles with the focus on last week’s important breakdown levels. Again, a break through these key levels should help confirm the improved setup for a deeper retracement to last week’s risk-off trade. In that regard, note the pullback following the initial rally in EUR/USD developed after testing key resistance in the 1.3115/55 area. Again, strength above here should set the stage for a closer test of the 1.33/1.34 zone. Moreover, the 1.5070/1.5115 area for Cable should act as the key pivot zone and define whether a deeper short term advance is underway. The current setup suggests that high beta should lead the way, but like other USD pairs we continue to monitor last week’s breakdown levels for confirmation. Note that the .9135 area for AUD/USD will be the key test as strength above should set the stage for another run at the medium term range highs. Moreover, USD/CAD sees important support in the 1.0215/00 area – again, where prices broke out last week. Note that yesterday’s bearish reversal days for EUR/AUD and EUR/NZD point to additional downside follow-through. Note that USD/JPY extended through last week's breakdown zone near 93.00/25 which includes the violated March trendline and suggests an improved setup. For cross JPY, the focus is also on last week’s breakdown levels including the 85.00/30 zone for AUD/JPY, as well as the 91.15/92.00 area for CAD/JPY. These levels should define whether a return to the April/May highs is underway.

ENDS

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