Germany IFO up today and may be the big focus after rising the last three months despite recent market turbulence.
MAJOR HEADLINES – PREVIOUS SESSION
- New Zealand RBNZ left rates unchanged at 8.25% as expected
- Japan Mar. Corporate Service Price rose 0.4% YoY vs. 0.8% expected
THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)
- France Apr. Business Confidence Indicator (0645)
- Sweden Mar. PPI (0730)
- Germany Apr. IFO (0800)
- UK BOE's Jenkinson to speak (0830)
- UK Mar. Retail Sales (0830)
- UK Apr. CBI Quarterly Industrial Trends (1000)
- EuroZone ECB's Trichet and governing council at ECB conference concerning statistics (1230)
- US Mar. Durable Goods Orders (1230)
- US Weekly Initial Jobless Claims (1230)
- US Mar. New Home Sales (1400)
- Canada Bank of Canada Monetary Policy Report (1430)
- Japan Apr. Tokyo and Mar. National CPI (2350)
Market Comments
The USD came back stronger yesterday after renewed attempts at breeching the 1.6000 level in EURUSD. The short term reasons for this were most likely due to lack of catalysts for the high levels rather than any new specific USD bullish information - the commentators gave credit to Juncker's comments about undesirable moves. See EURUSD chart below for a look at the technical situation.
Theme-wise, we wonder if we're about to see a shift here. There has been intense focus of late on the financial crisis, specifically the risks of big banks failing after the Bear Stearns shocker. Every writedown and need to shore up reserves has been getting the most prominent headline space. But the last few weeks have seen a rally in risky assets as the market breathes a sigh of relief and believes that the Bear Stearns breed of black swans can be counted out for now. But even if various systemic crisis scenarios have been averted, we can't avoid the fall-out of the deflation of the largest asset bubble ever that inevitably will mean a good old-fashioned recession, the frantic efforts of Bernanke and company notwithstanding. Working through an ugly period of slow growth may be less spectacular and intense than the events we have seen in the recent past, but it still should mean eventual pressure on risky assets - and a boon especially to the JPY.
For the longer term picture, we fully agree with Goldman Sach's view that major Asian currencies are vastly undervalued compared to European currencies - particularly the EUR itself. Goldman says that the overvaluation is to the tune of a whopping 25%. Even 20% would mean that a currency pair like EURJPY should be trading at 133 rather than 164... The problem for the moment is that EURJPY and most of the JPY crosses are slave to the risk picture and move up and down in tack with equity markets, so either a) the correlation with risky investments needs to be broken through a paradigm shift, or b) equities and other risky investments need to head south if the stronger JPY scenario is to materialize. In any case, EURJPY looks very expensive in our estimation, and crosses like PLNJPY look positively out of control.
The RBNZ's Bollard released a statement which read "we expect that the official cash rate will need to remain at current levels for a time yet". Apparently, Mr. Bollard's dropping of the word "significant" before the word "time" as compared to last month's statement was the guidance that sent the kiwi lower in the wake of the announcement of no change to the cash rate from the RBNZ. Considering our thesis in the paragraphs above, we are convinced that the NZD will be one of the worst hit by a global slowdown.
Canada's Retail Sales report was shockingly bad yesterday, with Sales dropping and this sent CAD tumbling after marginally more hawkish than expected guidance from the BoC the previous day. Still, oil prices failed to fall despite the reasonably large uptick in the USD from the day's lows on the US supply report and USDCAD still needs to take out 1.0275 and then 1.0325 before the long awaited bull trend is confirmed.
We will watch the IFO release from Germany today with particular interest. Germany has seen its own cycle of strength related to its strong export market, with the exporters able to survive the strong EUR due to the nature Germany's export mix: highly specialized and engineered products and services that are in strong demand around the world. Germany also never saw the delirious levels of housing construction and speculation seen elsewhere in the easy credit era. All in all, this means that the slowdown is slow in reaching Germany, where business sentiment is still high and unemployment is still falling. Still, we wonder if IFO sentiment can really notch another elevated level after rising three months in a row. This may be the key figure to watch today.
Chart: EURUSD
EURUSD is in a kind of ascending wedge formation, though the "ascension" isn't awfully steep in this case. According to the classic technical interpretation of this kind of formation, we should expect a sharp sell-off if the lower bound of the wedge gives way.