EURUSD taken all the way to “perfect” resistance ahead of the 3-year LTRO result, which saw nearly half a trillion Euros of take-up. And yet EURUSD faded sharply as EU sovereign spreads widened rather than tightening. Whoops…
Market expectations for today’s 3-year LTRO from the ECB were running in the EUR 350 billion range, so the EUR 489 billion take-up was far larger than expected and ahead of the auction, as we discussed in recent days’ commentary, would have been expected to be a bit risk- and Euro-positive. But apparently so many expectations were built into a strong number and risk had already rallied so sharply, that the number served as a catalyst for profit taking and perhaps for longer term money to come in and express doubt on whether the LTRO really addresses even shorter to medium term liquidity worries in the European banking system.
Certainly, the market doubted that today’s auction results would mean any immediate further relief for EU sovereign spreads, which jumped wider despite the huge participation by 523 EU banks. Spanish 10-year yields were nearly 20 bps higher as of this writing, Italy’s were up 23 bps, France’s were up 1 bp, and Germany’s were down 3 bps after a steep sell-off in Bunds earlier in the day. So without any significant improvement in sovereign yields, we are merely left with the fact that a whole lot of EU banks just got hold of a huge amount of effectively printed money – back door QE and therefore Euro negative, particularly given that risk spreads are not responding positively.
Chart: EURUSD
EURUSD rallied to perfect resistance area today, just shy of the recent 1.3210 low before heavy profit taking came in and pushed it deep back into the tight range from last week. Today’s reaction to the LTRO creates a compelling bearish candlestick, assuming we close near current levels or lower. The 1.30 area may not remain sticky for very long if recent lows are taken out once again.
Japan a deficit nation
Japan registered its eighth consecutive trade deficit in November – and that period of time of course coincides with the earthquake/tsunami catastrophe that struck in March, as Japan since then has shuttered its nuclear power plants for extensive inspections and maintenance, necessitating a massive import program of natural gas and other fuels for power generation. Still, Japan’s trade balance was trending downward before the March tragedy and exports of late have been tailing off sharply, including a -4.5% monthly decrease in November alone. Chinese demand.
The structural setup for Japan is very interesting heading into 2012. The strongest scenario for the JPY is one in which interest rates remain pegged to the floor (any rise in government yields, as we have pounded on the table about of late, suddenly brings the risk of sovereign insolvency rapidly forward), far more nuclear power is brought back on line to reduce fuel imports, and risk appetite remains on the defensive. Of these three factors, interest rates are the most important – and with the strong bounce-back in fixed income after the ECB LTRO today, EURJPY is suddenly back on the defensive. Remember the recent announcement, however, that the BoJ has vastly increased its intervention war chest.
Odds and ends
The UK MPC minutes were no real surprise today. The decision was unanimous. Some voiced further doubts on the UK economic outlook and said that more asset purchases might be needed. Others were concerned that inflation wouldn’t fade as much as the general MPC consensus has often stated they will. Forward rate expectations rose a couple of bps and as the Euro turned tail in the wake of the LTRO, this helped support GBP and EURGBP set a new 11-month low on the day, only 40 pips higher (so far) than the January low from this year. The 3-year low was a brief spike down below 0.8100 in the June of 2010.
The SNB allotted $320 million in 14-day USD swaps at its weekly auction as EURCHF maintains a tenuous hold around the 200 day moving average just below 1.2200. The big focus on any further pressure on the Euro is, of course, the declared floor at 1.20.
Sweden’s NIER (National Institute of Economic Research) today said that Sweden’s economy faces tough challenges ahead and forecast a mere 0.6% growth rate for next year and suggested that the Riksbank policy rate could decline to 0.75% by the end of 2012. This and the general reversal back to risk-off saw rates at the short end of the Swedish curve reversing a good portion of yesterday’s strong bounce and saw a very sharp reversal in USDSEK in particular. (With EURSEK also finding some support).
Chart: USDSEK
A huge bullish reversal on the day so far in USDSEK, and look at the technical significance of the massive 7.00 level if it is taken out in the days to come.
Strong Canadian retail sales were largely overlooked by the market doay, but this was a very strong reading at +0.7% MoM less Autos. For those looking for a glass-half-full idea for CAD, consider AUDCAD downside once again as risk is tarnished once again today and AUDCAD has posted an interesting shooting star reversal (caveat: as of this writing – daily candlesticks are best considered when the trading day is done.)
Looking ahead
So far, a key reversal in major USD crosses has unfolded today suggesting that the ECB LTRO was merely a buy the rumor, sell the fact event that squeezed the market a bit before reverting to the old Euro-negative trend. Nonetheless, traders should remain nimble, as market liquidity will hardly improve much from here until the first week of the New Year. Remember that the focus could also quickly swivel to Washington, were the ongoing debate (er, farce?) on whether and when the payroll tax cuts will be extended continues. The politicians are running out of time to figure it out.
For the the rest of the week, we’ve got a few data of interest, including New Zealand Q3 GDP tonight, the US weekly claims data and the University of Michigan final Dec. confidence data tomorrow. On Friday, watch out for the SNB’s quarterly report, the US Nov. Durable Goods Orders number, Canada’s October GDP, and US Personal Income/Spending and PCE inflation data. US New Home Sales are up on Friday as well.
Be careful out there.
Economic Data Highlights
Sweden Dec. Consumer Confidence out at -7.4 vs. -8.0 expected and -7.4 in Nov.
Sweden Dec. Manufacturing Confidence out at -11 vs. -14 expected and -11 in Nov.
Sweden Dec. Economic Tendency Survey out at 92.8 vs. 93.0 expected and 94.4 in Nov.
Canada Oct. Retail Sales out at +1.0% and +0.7% less Autos vs. +0.5%/+0.2% expected, respectively
Upcoming Economic Data Highlights (all times GMT)
Canada Oct. Teranet/National Bank Home Price Index (1400)
EuroZone Dec. Consumer Confidence (1500)
US Nov. Existing Home Sales (1500)
US Weekly DoE Crude Oil and Product Inventories (1530)
New Zealand Q3 GDP (2145)
John J Hardy
SAXO BANK