Markets are still in limbo despite last week’s drama – EURUSD needs to take out the next resistance level to keep the focus to the upside. Aussie looks very stretched ahead of RBA – but could it stretch higher still before consolidating?
The market is apparently a bit shell-shocked after the crazy back and forth of last Thursday and Friday, as today saw trading ranges very constrained after a brief zip higher in Asia in EURUSD and in JPY crosses that was quickly erased. The long end of the yield curve at the periphery saw little improvement today, but the market continues to make a strong vote in favour of Euro stability as the short end of the curve in Spain in particular has come ripping lower – another 55 basis points lower in fact, taking the Spanish two-year yield benchmark to below 3.50% now and thus to a new low since early May. Compare that with the brief spike to 7.00% in late last month. The moves on the Italian yield curve were of lower amplitude, but yields also headed lower there and the 2-year in Italy was a hair below 3.00% as of this writing.
Looking ahead
The strong move in the short end of the peripheral European yield curve is easing the pressure on the EU tail risks and is Euro supportive, all other factors being equal . The question for further out, of course, is whether EU politicians can begin to address the EU debt crisis more credibly and whether proper debt restructuring of bank and some public debt ever becomes a part of the debate. It will have to if the EU is to stay together. If it is lucky, it appears that the ECB bluster may have bought a brief window of time for the Euro to consolidate. A close above 1.2400 could set in motion a sequence toward 1.2600-1.2750, but I still think this is an exercise in timing the next turnaround.
Chart: EURUSD
We still have near term limbo for EURUSD, as we’ve yet to see the pair close through the key 1.2400 area and 55-day moving average. If it does, it’s easier to argue that the ECB has bought a window of time in which the single currency can continue to consolidate some of its losses. It is worth noting that “pattern reversals” in EURUSD have been miserably bad at predicting future action in recent weeks – and now we’ve seen two in a row – will they both prove unsuccessful.
The USD looks very stretched to the downside versus the commodity currencies. AUDUSD is at the top of its channel pattern versus the Aussie – suggesting it’s either time for it to move even more swiftly higher or sell-off steeply. On that note, we’ve got the RBA up tonight. An Aussie-positive outcome could see the pair looking at the next major resistance at 1.0700 if 1.0580 can be taken out, while the downside pivot looks like 1.0450. As usual, at least one-eye on equity indices on that account.
The RBA is on tap for the Asian session tonight, and judging from recent developments in Aussie data and market expectations, we should expect a no-move from the RBA. The moves in Aussie positioning have been whiplash-inducing in recent weeks, as the net speculative positioning in the US futures market was more than 50k short at the beginning of June, when AUDUSD was well below parity. Since then, we have seen market complacency/risk appetite and a recovery in Aussie rate expectations drive the Aussie back higher (or at least, an unwinding of the expectations on the degree to which the RBA will cut – the market is looking for about -75 bps for the year ahead vs. -110 bps just two weeks ago). Interestingly, the net speculative positioning in the US futures market reported on Friday (which reports the positioning as of last Tuesday) was at +37k. More of the shift has been about bulls increasing their positioning than it has been about the bears exiting their trades, meaning that the open positioning in Aussie is enormous relative to past years, when the Aussie speculative position was mostly a question of whether bulls are long or simply absent, as bears generally stayed away. We also have an Australian employment report on Thursday, which will be closely watched after a terrible June report.
Tomorrow, we have the Canadian July Ivey PMI survey, which surprisingly dipped below 50 last month. This also happened in mid-2011 in what proved to be a false alarm, but two bad surveys in a row will have many asking questions.
Economic Data Highlights
UK Jul. Lloyds Employment Confidence out at -51 vs. -53 in Jun.
Euro Zone Aug. Sentix Investor Confidence out at -30.3 vs. -31.0 expected and -29.6 in Jul.
Upcoming Economic Calendar Highlights (all times GMT)
New Zealand Q2 Average Hourly Wages (2245)
UK Jul. BRC Sales Like-for-like (2301)
Australia RBA Cash Target (0430)
John J Hardy,
SAXO BANK