All eyes this week on Fed guidance at Wednesday's FOMC rate announcement. Japan on holiday for much of the week.
MAJOR HEADLINES – PREVIOUS SESSION
- US Final Apr. University of Michigan Confidence out at 62.6 vs. 63.2 expected
- Japan Mar. Retail Trade rose 0.5% vs. 0.7% expected
THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)
- Germany May GfK Consumer Confidence (0610)
- EuroZone ECB's Trichet and others to speak (0700)
- Germany Apr. CPI (no time given)
- New Zealand Mar. Trade Balance (2245)
- Australia Q1 Business Confidence (0130)
Market Comments
EURUSD ticked up late in the US session in the US on Friday, but closed on the low side of the range for the week. The weekly EURUSD candlestick chart, in fact, shows what may prove a pivotal "outside bar" in which the highest levels for the week were above the highs for the last two weeks (and more) and the lowest levels were the lowest for the last two weeks. This is a rather bearish technical setup, but technicals will need some support from fundamentals this week if we are to call for a possible temporary bottom in the USD for now.
And a busy week it will be for US data. The most important event for the week by far is the FOMC rate announcement on Wednesday. The banks have been falling all over themselves of late to unwind their expectations of the terminal Fed funds rates for the cycle. And now the market predicts only 70%-ish odds of a 25 bp cut on Wednesday, and traders are even starting to place bets on the timing of the beginning of the subsequent tightening cycle, with bets placed as early as October.
The market may be getting well ahead of itself on its predictions on the US rate trajectory, and these predictions are related to all of the recent optimism that the worst is over and that we can start looking forward to the end of all of the recent turmoil and getting back to a healthy growth trajectory. As we have discussed before, we are less than optimistic that the fallout from the credit bubble blowup is behind us and have promoted the idea of a two phase process to this. The first phase is the financial/credit blowup phase, which we may or may not have worked through at this point with the huge damage already inflicted on banks (but we pose the question: what happens if the credit spread blow out again on another swing in sentiment - aren't we just back to square one in that instance?) Regardless of where we stand in the first phase, the second phase will be the grinding slowdown in the "real economy" triggered by the first phase and the overhang created by the credit bubble. This phase is only just getting underway, and in only some parts of the world.
Looking at US stock market sentiment indicators, the near-record bearishness readings that coincided with the recent bottom in the market have now moved to new recent lows in bearishness (and highs in optimism). Is it time to get contrarian or are we a bit early here? Potential for this week being pivotal would seem to be high and it may be a good time to establish fresh long JPY positions through options or in spot if technicals show a firm sign of a reversal, which they have yet to do.
The FX moves generated by any big sentiment shift this week will be felt most along the axis of risk willingness, with a new bond rally/stock market sell-off pushing JPY and CHF stronger and the likes of AUD and NZD weaker, etc... The USD picture is perhaps less dependant on the risk axis and more dependent on whether the global recoupling story finds any traction. Last week's German IFO may have been a shot across the bow for this development.
Watch out for those German CPI numbers today as possible short term volatility triggers. Japan is out on holiday for most of the week for Golden Week festivities and won't be back for good until next Tuesday, no doubt causing thin trading conditions at times in JPY crosses.
Chart: EURUSD
Note the outside bar for last week that may indicate a further consolidation for the pair, a development which may hinge on the data this week and shifts in sentiment. In the wider focus, the last couple of years of the EURUSD trend shows each phase of appreciation turning steeper than the last one. This suggests that the end of the EURUSD uptrend, whenever it materializes, may be extremely sharp and deep.