What to do with the US dollar on positive US data? It’s tough to argue that the USD should sell-off if this means a delay to QE3. Is this market so hung up on the central bank liquidity that good is bad for risk?
The US Retail Sales data was the day’s highlight, as it came in stronger than expected and at the stronger end of the range of the last few years, in fact. Strong US data is the most difficult kind of data to react to in this market. On the one hand, it is USD positive because it delays the much touted prospects of QE3, but on the other hand, there is still a background fear that global economic growth is weakening, so good data is nominally supportive of risk appetite, which is generally USD negative. So, one could argue that the USD reaction, therefore, is lose-lose on good US data. But that’s only the case if risk appetite continues to bull on higher here, so stay tuned, as we are at multi year highs in complacency in terms of FX and equity implied volatility.
While the directional USD arguments are somewhat convoluted and confusing, It makes sense that the JPY was the weakest currency on the back of this data, as bonds sold off quite steeply and the recent weak Japanese data highlights the overvaluation of the JPY if risk appetite remains on. There’s lots more wood to chop in USDJPY, but interesting levels are already approaching not far above 79.00 (see chart below).
Chart: USDJPY
USDJPY rallying of the US retail sales data release as bonds sold off heavily, and if bonds are an important coincident indicator for the JPY, there could be some more catching up to do to the upside. Bonds will need to stay on the defensive to see the pair back above 80.00 again.
Odds and ends
The German ZEW survey was terrible, but the Euro wasn’t particularly weak on the day, suggesting that the bar is very high for negative data to move the Euro. As mentioned yesterday, the EURAUD cross may be the biggest mover if this Euro consolidation deepens.
The UK CPI was theoretically a bit supportive of sterling, but we’ll need to see many more months of data before the trend is worth reacting to. If the Euro is recovering a bit here in the crosses, it is hard to see GBP getting much of a bid – even if the GBPUSD resistance finally manages to break for a while.
Looking ahead
This positive US data point has underlined a recent trend in better than expected US data. And the high PPI data is also negative for bonds – though tomorrow’s CPI release is more important than the PPI and bonds have eased down to critical levels (the US 10-year benchmark is back up above 1.70%, around where it found support on two previous occasions since early June). Tomorrow’s US Empire Manufacturing survey and the Philly Fed survey on Thursday are the other two data points to watch to see if the better (increasingly less bad) US data trend continues. If it does, we’ll continue to have a critical test for market sentiment – should we be seeing this as the Tepper trade (Heads: risk appetite wins because the economy is growing better than we feared and this is good for earnings, etc. or Tails: risk appetite wins because the QE3 cavalry will be on the case very soon to support market liquidity.) I would suggest that the Tepper mentality is getting very long in the tooth and wonder if market cycles are about to change here, as evidenced by the continued weakness in bonds and the consolidating Euro. (There was also this article from Bloomberg this morning that piqued my interest.) This market is going to be on the hunt for new themes soon – the extremes in complacency of late and this summer drawing to a close suggest that the timing may be rather soon.
Stay careful out there.
Economic Data Highlights
UK RICS House Price Balance out at -24% vs. -23% expected and -22% in Jun.
Australia Jul. NAB Business Conditions out at -3 vs. -1 in Jun.
Australia Jul. NAB Business Confidence out at 4 vs. -3 in Jun.
Germany Q2 GDP out at +0.3% QoQ and +0.5% YoY vs. +0.2%/+0.9% expected, respectively and vs. +1.7% YoY in Q1
Switzerland Jul. Producer and Import Prices out at -0.3% MoM and -1.8% YoY vs. -0.2%/-1.7% expected, respectively and vs. -2.2% YoY in Jun.
Sweden Jun. Industrial Production out at +0.4% MoM and +1.1% YoY vs. -1.0%/-1.1% expected, respectively and vs. -2.4% YoY in May
Sweden Jun. Industrial Orders out at -0.2% MoM and -1.9% YoY vs. -3.5% YoY in May
Sweden Jul. CPI out at -0.4% MoM and +0.7% YoY vs. -0.3%/+0.8% expected, respectively and vs. +1.0% YoY in Jun.
UK Jul. CPI out at +0.1% MoM and +2.6% YoY vs. -0.1%/+2.3% expected, respectively and vs. +2.4% in Jun.
UK Jul. RPI out at +0.1% MoM and +3.2% YoY vs. -0.2%/+2.8% expected, respectively and vs. +2.8% YoY in Jun.
Germany Aug. ZEW Survey out at -25.5 vs. -19.3 expected and vs. -19.6 in Jul.
Euro Zone Q2 GDP out at -0.2% QoQ and -0.4% YoY as expected and vs. 0.0% YoY in Q1
Euro Zone Jun. Industrial Production out at -0.6% MoM and -2.1% YoY vs. -0.7%/-2.1% expected, respectively and vs. -2.8% YoY in May
Euro Zone Aug. ZEW Survey out at -21.2 vs. -22.3 in Jul.
US Jul. Producer Price Index out at +0.3% MoM and +0.5% YoY s. +0.2%/+0.5% expected, respectively
US Jul. PPI ex Food and Energy out at +0.4% MoM and +2.5% YoY vs. +0.2%/+2.3% expected, respectively and vs. +2.6% YoY in Jun.
US Jul. Advance Retail Sales out at +0.8% MoM and +0.9% ex Autos and Gas vs. +0.3%/+0.5% expected, respectively
Upcoming Economic Calendar Highlights (all times GMT)
US Jun. Business Inventories (1400)
US Weekly API Crude Oil and Product Inventories (2030)
Australia Aug. Westpac Consumer Confidence (0030)
John J Hardy,
SAXO BANK