Yesterday’s EURUSD rally revealed that Euro shorts are rather heavy, but the on-going story continues to make it tough for the single currency to maintain any upside traction. EURGBP has hit a fresh 15-month low.
We were ready to accept that yesterday’s reversal in the Euro might be the beginning of a consolidation phase that might last for a week or more, particularly given the widely covered massive short exposure to the currency among speculators. But today’s events and the firm rejection of most of the rally today suggest that the story may be more oversold than the currency. If we have a glance over at the options market, it is remarkable to note that downside skew in options has come roaring off the record low levels seen last November. The volatility on 3-month 25-delta calls is now only 2.5% cheaper than on puts, rather than the almost 4.5% that was reached in mid-November when EU sovereign debt spreads were at their record wide levels.
As for today’s EU developments, we had the news (according to Spain’s El Pais) that the Spanish region of Valencia was late in making a EUR 123 million payment to Deutsche bank, a payment that the federal government was forced to cover. There were also rumours circulating of Spain seeking IMF and EU help for dealing with its bank debt, though these were officially denied by Spain (meaning they must be true?). Slightly better news from Germany, which managed to auction off most of the maximum target in 10-year Bunds. This was far better than the previous disastrous result and saw Bund yields falling slightly, while yields in Spain and France rose sharply on the day (12 bps and 8 bps on 10-year debt, respectively).
Odds and ends
EURGBP
EURGBP has etched a new local low here below 0.8300 today and thus took out the 2011 low and could focus on the multi-year low from mid-2010 as well down below 0.8100 (lowest weekly close since 2008 has been around 0.8180). There’s little to celebrate about the pound sterling, of course, with only the logic of “at least it’s not the Euro” driving it here, it seems. In GBPUSD, the limits of the 1.5425 to 1.5775 range has been tested five times now.
FOMC Minutes
The media and analysts devoted considerable attention to the FOMC minutes from late yesterday, which point toward more Fed efforts at broadcasting its forecasts for economic policy. Only a brief comment here from my personal peanut gallery – why is this in any way helpful? The Fed has proven worse than a chimpanzee with darts at forecasting the economy – so the problem now will likely be that the Fed will forecast a policy down the line that doesn’t materialize because the anticipated economic conditions diverge with reality.
Of course, since the global financial crisis got under way back in late 2008, all of us market participants have been increasingly reduced to mere puppets that are subject to the manipulation of the central bank and government marionettes. It’s a sad state of guessing and second guessing policy moves rather than gauging true market strength or weakness. By that token, yes, new Fed forecasts of potential policy moves in the event of either economic weakness or strength could mean that data releases are filtered for how they will influence the probability of various policy actions coming to life – but could would it do anything to relieve the basic uncertainty? Doubtful.
Iowa caucuses
The US presidential election season is now officially in full swing, even though it’s already seen unbearably heavy coverage in the press for months now. The only real news is Santorum, who came out of nowhere to essentially tie Romney. This should be seen as a resounding defeat for Romney, and the next key is not the first primary in New Hampshire on the 10th (he is effectively “the local candidate” there. It will be an interesting sideshow, though, particularly if Santorum is able to get anywhere near a tie with his main rival) but in South Caroline on the 21st and Florida on the 31st of this month. Ron Paul remains the dark horse, though from the Iowa result it appears that the US literally needs riots in the streets or some dramatic new event for the population to consider such a radical departure from mainstream politics, even though dissatisfaction with politics as usual is at a record high.
Looking ahead
The first couple of trading days of 2012 proved very painful for the bears and a couple of interesting technical levels were taken out here and there – most notably the 200-day moving average in the US S&P500 (though it is rather interesting to note that the MSCI emerging markets index is miles below its 200-day moving average and has been a somewhat leading indicator for the US market since early 2009 at a number of turning points, with a small exception here and there).In currency land, the EURUSD is no longer any kind of a risk barometer, as we have discussed before, though the AUDUSD certainly is. In the latter pair, the 200-day moving average for AUDUSD is still intact at just above 1.0400, though we need to see sub-1.02 levels again and very quickly to believe that this was a very short term squeeze rather than a more lasting attempt to keep the pair in the higher range for a while.
Up tonight we have the Australian and Chinese Services PMI, with UK and North American Services PMI’s to follow tomorrow. France is up with a heavy, long term bond selling program – one to watch.
Economic Data Highlights
Germany Dec. Final Services PMI adjusted lower to 52.4 vs. original 52.7 estimate
EuroZone Dec. Final Services PMI adjusted higher to 48.8 vs. original 48.3 estimate
UK Dec. Construction PMI out at 53.2 vs. 51.5 expected and 52.3 in Nov.
UK Nov. Mortgage Approvals out at 52.9k vs. 52.5k expected and 52.8k in Oct.
EuroZone Dec. CPI Estimate out at 2.8% YoY as expected and vs. 3.0% in Nov.
Upcoming Economic Calendar Highlights (all times GMT)
US Nov. Factory Orders (1500)
US Weekly API Crude Oil and Product Inventories (2130)
US Dec. Vehicle Sales (2200)
Australia Dec. AiG Performance of Services Index (2230)
Australia Nov. Trade Balance (0030)
China Dec. HSBC Services PMI (0230)
John J Hardy
SAXO BANK