FX Daily Planet: New York Open

FX Daily Planet: New York Open

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View for the day

The rebound in European equity markets which are currently trading in positive territory has set the tone for a bounce in high beta FX. AUD and SEK have led the way after both posted sharp losses this week. JPY has come off worse than USD and with US equity futures currently printing in positive territory, the bias is skewed for a further bounce in risk. Of course all this could change if markets are faced with further negative news flow from the Euro area. At the time of writing, the markets await the results of the German vote on their contribution to the European Stabilization Mechanism (ESM). The final result from the lower house should be known shortly with the Bill then being sent to the upper house who will vote at 14:00 (Berlin time) or shortly thereafter. Either way, this could generate market movement, by either extending the gains made today or reversing them and a move back into risk off mode.

Today also sees European finance ministers meet once more to hammer out technical details of the ESM and to discuss reform to economic governance. This meeting is of additional siginficance following the unilateral introduction of trading restrictions by Germany this week, a decision which has raised legitimate concerns about the degree of policy co-ordination within the EU.

The data flow in Europe has been brisk but unsurprisingly, manufacturing confidence data showed that the impact of the sovereign crisis is having an impact with both the May flash estimate of PMI and the German Ifo softer than expected. The euro area capital flow data will receive more attention than usual given that March was the heart of the debt storm in Greece. The region did record a net outlow of portfolio capital in the month (€12.4bn) but this was mainly due to an increase in european purchases of foreign assets (largely equities) rather a flight of foreign capital from the region. Indeed, foreign investors bought slightly more euro assets on the mth (€17.7bn vs €16.5bn in feb), including noticeably more bonds (€20.8bn vs €4.6bn) and equities (€13.8bn vs €8.8bn). The only category that showed an outflow of foriegn capital was money markets (-€17bn). Overall though it is hard to detect any obvious flight of long-term investos as a result of Greece. Putiing the flow today together with price action it would seem that investors sold peripheral assets in March but were swtiching into the core rather than exiting the euro entirely (EUR was steady through March after all). Genuine capital flight, if that is indeed what occured (as opposed to spec selling), is only likely to be evident in the April/May data

Overnight news

JPY: Euro area flash estimate of manufacturing PMI is weaker than expected. German Ifo is slightly weaker than expected Euro area current account moves into surplus but posts a deficit on the financial account.

GBP: PSBR is slightly lower than expected at £10bn.

JPY: The BoJ left its policy rate unchanged at 0.10% as widely expected while providing an outline of new loan scheme aimed at supporting industries with growth potential; according to the outline, the BoJ will extend loans to private banks at 0.1% under the new scheme with 1-year maturity.

CNY: The PBoC will deposit 40 billion yuan of cash with banks for three months on May 25, it said in a statement posted on its website today.

NZD: Prime Minister Key said, “A top rate of 33% (personal tax) therefore helps our international competitiveness”, “In particular, it means we have a very competitive tax system compared to Australia.

NZD: April credit card spending rose 1.9% vs perv 6.2%

USD: The Treasury Departmen said Treasury Secretary Geithner will visit Germany and the U.K. next week to discuss the European debt crisis; he will meet with U.K. Chancellor of the Exchequer Osborne and ECB President Trichet on May 26 and German Finance Minister Schaeuble on the next day.

USD: The Senate passed a far-reaching financial regulatory bill. The legislation is intended to prevent a repeat of the 2008 crisis, but also reshapes the role of numerous federal agencies, and vastly empowers the Federal Reserve, in an attempt to predict and contain future debacles.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

CAD: Apr CPI (%oya) @12:00 (JPM: 1.6, Cons: 1.7); Apr CPI core (%oya) @12:00 (JPM: 1.7, Cons: 1.8); Mar retail sales (%m/m, sa) @13:30 (JPM: 0.0, Cons: 0.1); Mar retail sales ex autos (%m/m, sa) @13:30 (JPM: 0.3, Cons: 0.4)

MXN: Banxico rate announcement @15:00 (JPM: 4.50, Cons: 4.50)

Overnight price action

FX: Risk FX bounces, led by AUD and SEK.

FX vol: Front-end vol remains bid

Commodities: Gold is 1% higher whilst oil is unchanged

Bonds: European bond futures are broadly higher despite the bounce in equities

Equities: European equities bounce but gains are quickly evaporate

Technical View for the day

The nervousness around the European sovereign debt crisis is finally spilling over into a strong risk aversion and expanding from a rather European issue into a worldwide issue as risk markets around the globe are getting under increasing pressure. The S&P500 has already penetrated key-support at 1091 and is now focusing on neckline support at 1062, which if taken out, would deliver the final certainty that we are dealing with a much broader risk consolidation that could last for 6-9 months and retrace between 61.8 % and 76.4 % of the gains made since March last year. This could send 10YR US yields down to 2.79 % and potentially to 2.50 % where a 2nd higher bottom compared to the 2.035 % low from Dec.08 is expected to be formed. Particularly commodity currencies but also CE3 currencies are expected to remain under pressure over the coming weeks whereas EUR/AUD could ultimately retrace back to 1.6400 or 1.6640, EUR/CAD back to 1.3935/70 and EUR/NZD back to 2.0537 in form of internal 382 % retracements. Please note that as long as these levels are not taken out the long-term down-trend for these currency pairs remains intact.

Research from the region you may have missed

FX margin accounts maintain JPY shorts: risk of unwinding remains intact

ENDS

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