Yesterday was a climax reversal of the classic sort: as Bernanke was heading out to deliver his testimony, the short term nervous trades focused on the headlines showing Bernanke’s fear that fiscal austerity was risking the economic recovery. But listening to the Joint Economic Committee’s questioning, I got the very strong feeling that things are changing on Capitol Hill and that many memebers of Congress are learning how the Fed game works and are cottoning on to the negative side of QE.
There were questions about financial stability that Bernanke was forced to spend a good deal of time discussing (even provoking the comment that tapering could begin at the next meeting or two even if other commnts suggested Mr. Bernanke wasn’t ready to move at this time). There was a question about the risks of a rentier society caused by the “housing boom” that is mostly about wealthy/hedge funds acquiring homes for renting out to the credit/capital poor. There was one very straightforward comment from a Congressmen who was clearly hearing from his constituents back home that low rates and QE are doing nothing for their day to day life or business prospects and he made a blanket condemnation of the Fed’s efforts.
From Bernanke’s testimony I get the distinct impression that the transition to a new Fed chairman will be anything but an easy continuum to Janet Yellen or another money-printer of Greenspan/Bernanke stripes. It is actually my fervent hope that this current market move deepens and causes considerable embarrassment to the Fed and its bubble-blowing and thus raises the odds of a political wakeup call that forces a new course away from the endless morass of QE.
The FOMC minutes added to the negative mood as the discussion and controversy over when to begin tapering asset purchases is clearly picking up. From yesterday’s action in the markets and the due to the degree to which they have inflated this massive reach for yield and risk, it is eminently clear what will happen when the Fed pinches off, say, $25 billion a month in asset purchases from the liquidity firehose. Good luck with that polishing the legacy routing, Mr. Bernanke. That will perhaps be economic history’s tallest task ever.
In other news, the weak Chinese manufacturing data shows the risks of an ongoing meltdown in the Antipodeans (AUD and NZD) and also raises the risk of a Chinese pushback against the weak JPY move of late. The euro zone preliminary PMI’s were not as weak on the manufacturing front as feared, but weaker on the services front. Nothing to write home about there.
Looking Ahead
The market is playing fast and loose here and market action is all about an overall shock to the consensus trades out there – especially the heavily positioned short JPY trades. Expect very dramatic volatility for some time now, particularly if the JPY crosses manage to work through the next layers of support. AUDJPY has fully broken down, and EURJPY and USDJPY have probed through the first layers of key support – stay tuned and glued to those JPY crosses and the equity markets for further inputs – the roller coaster ride is virtually guaranteed to continue.
Highlighted Technical observations EURUSD – an epic reversal of such large scale yesterday that picking re-entries is difficult (especially as USDJPY liquidation can cause temporary squeeze). Levels include the 38.2% retracement around 1.2890 and then the daily pivot a bit higher. Insanity ensues if we push back through perhaps 1.2925 as this would suddenly throw the quality of the reversal into doubt. To the downside, the actual recent low was 1.2800, and then we have the neckline of the head and shoulders formation creeping higher.
USD/JPY – 101.85 was taken out and 101.85-102.00 are key resistance. Parity calls and if broken, perhaps the Ichimoku cloud upper bound, which comes in at around 97.00 at present.
EUR/JPY – 131.15 is the resistance as this was the support recently – a break of 130.00 could lead to a 126.50 upper Ichimoku daily cloud test.
EUR/CHF – move shatters the recent uptrend and directionally, would expect the pair to track EURJPY – could dive all the way back into the range short term.
AUD/USD and NZD/USD – liquidation argues against technicals. Eventually, I would expect NZD to take the downside lead on “catchup” trading. Note the 2012 low at 0.9580 in AUDUSD, but 0.9400/50 is the bigger area of interest.
EUR/NOK and EUR/SEK – shows what happens when risk goes off – less liquid currencies become undesirables. Prefer EURSEK rallies most.
Economic Data Highlights
- China May HSBC Flash Manufacturing PMI out at 49.6 vs. 50.4 expected and 50.4 in Apr.
- France May Preliminary Manufacturing PMI out at 45.5 vs. 44.7 expected and 44.4 in Apr.
- France May Preliminary Services PMI out at 44.3 vs. 44.5 expected and 44.3 in Apr.
- Germany May Preliminary Manufacturing PMI out at 49.0 vs. 48.5 expected and 48.1 in Apr.
- Germany May Preliminary Services PMI out at 49.8 vs. 50.0 expected and 49.6 in Apr.
- Euro Zone May Preliminary Manufacturing PMI out at 47.8 vs. 47.0 expected and 46.7 in Apr.
- Euro Zone May Preliminary Services PMI out at 47.5 vs. 47.2 expected and 47.0 in Mar.
- UK Q1 Preliminary GDP (0830)
- UK Mar. Index of Services (0830)
- US Fed’s Bullard to Speak (1005)
- US Weekly Initial Jobless Claims (1230)
- US Weekly Bloomberg Consumer Comfort Index (1345)
- Euro Zone May Consumer Confidence (1400)
- US Apr. New Home Sales (1400)
- US May Kansas City Fed Manufacturing Activity (1500)
- Euro Zone ECB’s Noyer to Speak (1600)
- Euro Zone ECB’s Weidmann to Speak (1730)
- New Zealand Apr. Trade Balance (2245)
- Japan BoJ’s Kuroda to Speak (0255)