My favourite observation of US Federal Reserve chairman Ben Bernanke’s testimony yesterday was the comment that he successfully managed to “walk the line”(not a particularly interesting article, but “walking the line” is a great metaphor for Bernanke’s performance yesterday). Bernanke managed to deliver a very carefully crafted message that saw the market failing to gain a toehold on his rhetoric after last Thursday’s dovish remarks. He essentially offloaded responsibility for Fed policy onto incoming data and reminded the market that current expectations are for Fed tapering of purchases, possibly ending them by mid-next year, provided that the economy performs as forecast. Since the economy won’t perform as forecast, we can expect the Fed to do what it has always done and implement new policy in the rear-view mirror. The issue going forward is more about whether new Fed leadership disrupts the continuity of Fed policy. Then there is the change of the Fed’s banking oversight powers, another important factor in Fed policy from here for possibly reigning in bank leverage.
GBP, CHF and JPY, oh my!
Today’s UK retail sales data is likely to confirm or deny the impression the market drew from the Bank of England minutes, which saw the dovish voters on the BoE abandoning their near-term call for further asset purchases and a unanimous decision to keep BoE policy unchanged for now. EURGBP is trying to reverse yet again after getting altitude sickness above 0.8700 yesterday. This is the most impressive of the three reversals and with a hot European August stretching out before us, mean reversion back into the range may be the scenario of least resistance.
From a long period of slumber, one of my favourite crosses from back in the day, GBPCHF, may be awakening from a deep slumber, as EURCHF is showing signs of sell-off fatigue and we have the intriguing – and third recent – bearish reversal in EURGBP, meaning that GBPCHF could be the high octane pair among the European majors.
Chart: GBPCHF
A sharp reversal attempt from this pair and the above considerations could finally see a more durable rally attempt than anything the pair has managed to muster recently, though we need another sharp impulse higher to neutralise the grinding sell-off of recent weeks.
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Looking across the market, an additional argument for CHF weakness is the weakness in JPY, as recent history has seen a tendency for JPY direction to lead CHF direction. See the chart below.
Chart: Trade weighted JPY and CHF
For the last six months or more, the JPY (in yellow below) tends to lead CHF (blue), such that CHF has some catching up to do to the downside if the JY stays weak and this relationship continues.
Bank of Canada
The BoC meeting was relatively dovish, as the language in the monetary policy statement explicitly pointing to a future rate hike was removed, though the forward guidance does point to expectations of an eventual normalisation of policy, which is effectively the same thing. Two-year Canadian swaps have drooped about 3 bps from their close a couple of days ago, only very slightly more than their US counterparts. Nonetheless, the downside momentum has now run out of USDCAD and the upside is becoming more compelling, with a move back above 1.0500 offering confirmation that we’re back on track for higher levels. WTI crude oil prices that start moving in the direction of the forward curve (massive backwardation in crude prices at the moment – almost at records) would give the upside argument further impetus.
Looking ahead
Today sees the market looking for incoming data as the major input as Bernanke did his best to shift the market’s focus onto data rather than any strong hint at the Fed’s intentions. The US data today includes weekly jobless claims and the Philadelphia Fed manufacturing survey, with reaction potential on strong outliers. Bernanke will also be out testifying again, this time before a Senate committee, with the Q&A perhaps a bit more weighty than some of yesterday’s surprisingly feeble questioning.
Interest in housing market data will pick up again after yesterday’s extremely ugly housing starts and building permits numbers for June. The shocking shortfall in the figures could merely be due to major home builders exercising a dose of caution after mortgage rates backed up so sharply in May and June as they worry that demand could dry up. Meanwhile, the most forward looking US housing-demand related survey I’ve studied in the past, the NAHB survey, was extremely strong in June, so we shouldn’t read too much into this just yet. US June New Home Sales are up next week.
Otherwise, the major US incoming data will have to wait until the week after next and we’re approaching the potential summer doldrums. Looking back through history, EURUSD tends to be quieter during the month of August (with 2008 an extremely notable exception) than USDJPY.
Economic Data Highlights
- New Zealand July ANZ Consumer Confidence out at 119.8 vs. 123.9 in Jun.
- Australia Q2 NAB Business Confidence out at -1 vs. +2 in Q1
- Japan June Nationwide Department Store Sales out at +7.2% YoY vs. +2.6% in May
- Switzerland June Trade Balance out at 2.73B vs. 2.15B expected and 2.12B in May
- Eurozone May Current Account out at +19.6B vs. +23.8B in Apr.
- UK June Retail Sales (0830)
- UK BoE’s Bailey to Speak (0830)
- US Weekly Initial Jobless Claims (1230)
- US Weekly Bloomberg Consumer Comfort Survey ~(1345)
- US July Philadelphia Fed Survey (1400)
- US June Leading Indicators (1400)
- US Fed’s Bernanke to Deliver Semi-Annual Testimony to US Senate (1430)
- New Zealand Jun. Credit Card Spending (0300)