International Trading

Dollar sell−off slows, but global picture hasn't changed

Posted by Usman Ali Minhas on Tuesday, September 28, 2010 , under , , , , , , , , , , |



International Trading



On Monday, EUR/USD basically held a sideways trading pattern in the 1.34 big figure, digesting Friday’s steep gains. During the morning session in Europe, Moody’s downgrading some debt ratings of Anglo Irish turned the market focus again to the Irish government finances. Nevertheless, after all the damage for the euro was limited. The pair reached an intraday low at around 1.3425. Dollar weakness resurfaced once US traders came in. Decent European lending data might have lent the euro some support, too. EUR/USD even reached a minor new high just above the 1.35 mark. However, with no high profile eco data on the agenda, the 1.3510 resistance (50% retracement) perfectly played its role. EUR/USD settled again in the previous intraday sideways trading pattern. A moderate correction on the equity markets also prevented further EUR/USD gains. In an appearance before the European parliament, ECB President Trichet didn’t bring any high profile news on the Bank’s assessment of the economy or on monetary policy. The ECB President advocated the need for stricter rules on budgetary discipline, including penalties. EUR/USD closed the session at 1.3455, compared to 1.3492 on Friday evening.
Today, the calendar of eco data contains some interesting releases. German CPI and French spending are interesting, but probably no market movers. This might be different for the US CS house prices and the US consumer confidence. Disappointing US data might fuel the speculation on more QE in the near future and weigh on the US currency. Of course, one should also keep an eye on the European sovereign debt story. However, looking at yesterday’s price action the widening of the spreads in peripheral countries and especially the negative headlines on Ireland had remarkably little impact on the single currency. According the an article in the WSJ, the Fed is said to considering a smaller-scale bond buying program incase they would set up additional QE . However, at least for now this element of the QE debate didn’t give much support to the US dollar.
The Fed’s assessment on the economy and the potential consequences for monetary policy have changed the framework for trading on global markets. At first stage, the risk for more US QE (logically) is seen USD negative. In a longer term perspective, there is not only the issue/risk of more QE from the Fed. Other major economies face similar issues of deflationary risks or have their own specific problems that might undermine investor confidence at some point in the future. For example, any additional QE from the Fed at some point might force other central banks (like the BOJ, the BoE or the ECB) to take more ‘unconventional’ measures, too. In addition, slowing global growth and a weaker dollar might over time also be a negative scenario for (peripheral) European economies.
They desperately need (export-driven) growth to keep their government finances on a sustainable trajectory. So, in a long-term perspective a lot of different scenarios are still possible and markets refocusing on European sovereign risk at some point might obviously be one of them. However, in a short-term perspective, we continue to see the risk for more Fed easing as the dominant factor for currency trading. Dollar weakness is the name of the game and at least for now, any USD negative news still seems to attract additional USD selling. Recently we had a USD-negative (EUR/USD positive) bias. We maintain a buy-on-dips approach. The dollar negative trend looks quite strong. Nevertheless, we still hope for somewhat of a more pronounced correction to add to EUR/USD long exposure.
From a technical point of view, until mid September, EUR/USD was locked within a sideways trading pattern between 1.2923 (mid August high) and 1.2588 (24 August low). The break beyond this level improved the technical picture and opened the way for a retest of the early August high at 1.3334. This high profile level was easily cleared after the Fed meeting. The targets of this break are well beyond the 1.40 mark! In a day-to-day perspective, EUR/USD entered a consolidation pattern after last week’s rally. Nevertheless, the global picture remains EUR/USD positive (in fact dollar negative).
Absolutely no story to tell on USD/JPY price action on Monday. The pair was paralyzed in an extremely tight trading range in the lower half of the 84.00 big figure. Global dollar weakness is still perfectly counterbalanced by the fears for renewed BOJ interventions and ongoing market talk on the BOJ potentially engaging for further policy easing in the near future. Among other measures, the government continues to push the BOJ for raising its government bond buying. USD/JPY closed the session at 84.29 compared to 84.21 on Friday evening.
This morning, there were only some second tier eco data on the agenda in Japan. Markets are looking out for the key Tankan report scheduled for tomorrow morning. This report might be an important input for (monetary) policy going forward. Asian equities returned part of yesterday’s gains, but at least for now this is no big issue for USD/JPY trading.
Over the past two weeks, USD/JPY trading entered a new area as the BOJ on behalf of the Japanese Ministry of Finance stepped into the market to block the uptrend of the yen. In this context, the usual drivers for USD/JPY (global investor sentiment and to a lesser extend US and/or Japanese economic data) have lost most of their relevance for USD/JPY trading. Markets and the BOJ are now engaged in some kind of cat-and-mouse game. For now, it looks the BOJ has still the upper hand in this game. Of course, this balance can change over time (e.g. after the end of the quarter). In a longer term perspective, we hold on to our view that it will be difficult for the BOJ convince its trading partners on the need for a weaker yen. At best, they might get some kind of silent approval to slow a too sharp rise of its currency.
Short-term, we expect the tactical game between the Japanese authorities and the market to continue. In a day-to-day perspective, we still hold on to our view that the downside in this pair is rather well protected. Additional tactical waves of yen selling are still possible, but we expect the impact of further action to fade rather soon. Short-term players can look to join the BOJ for a next spike higher. Nevertheless, this remains a binary game and the fears for more QE after last week’s Fed statement haven’t increased the upside potential of the US currency overall. So tight stoploss protection remains warranted. One might also assume that ever more investors (e.g. Japanese exporters) will use a new spike in the wake of additional BOJ action to offload USD long exposure.
On Monday, cable slightly outperformed EUR/USD. So, EUR/GBP also returned a part of last week’s gains. The headlines on Anglo Irish triggered some stop-loss euro selling in this cross rate too and contrary to EUR/USD, this correction wasn’t reversed later in the session. A constructive IMF report on the fiscal consolidation in the UK might have been slightly sterling supportive, too. Nevertheless, with the pair still holding north of the 0.8500 mark, the global picture hadn’t changed. EUR/GBP closed the session at 0.8500, compared to 0.8525 on Friday.
Today, the UK calendar contains the final revision of the Q2 UK GDP. We consider this as outdated news. Later in the session the CBI reported sales will be published. Overt the previous months this indicator showed rather strong readings. A slightly less positive figure is expected. If so, this might be slightly negative for sterling.
EUR/GBP drifted lower from mid July to late August. Amongst others, this move was support by some encouraging eco data from the UK at that time. However, late August EUR/GBP showed some signs of bottoming out. The key 0.8066 support was never challenged. Since then a gradual rebound occurred. This move was both due to global euro strength but also mirrored investors’ disappointment on some poor UK eco data of late. In addition, the interest rate differentials (at the short end of the curve) moved slightly in favour of the euro. Earlier this month, the EUR/GBP pair tested several times the 0.8363/0.8400 resistance area. Last week, the pair did break this area in a convincing way. The Fed statement apparently made investors think that the BoE at some point might also consider more QE. Wednesday’s BoE minutes were seen as confirming this feeling on potential additional steps from the BoE and pulled the trigger for EUR/GBP to clear key 0.8532 level (July 19 high). At the end of last week, some consolidation/profit taking on the recent steep gains kicked in. However, as we expect any more disappointing UK data to keep speculation on more QE alive, we think that the upside for sterling (even against the euro) will be limited for now. So, we maintain a buy-on-dips approach.

Various factors supported global bonds

Posted by Usman Ali Minhas on , under , , , , , , , , , |



International Trading



Markets: Fixed Income

Following a downward profit-taking correction on Friday, global bonds were again well bid on Monday, reversing all of Friday’s losses and closing the session with juicy gains. US yields dropped between 2.4 and 8 bps and the German yields by 1 to 7.7 bps, in both cases flattening the curve. While there was maybe some risk aversion trade behind the gains, we shouldn’t overemphasize these as equities didn’t do too bad, sliding only moderately and keeping a large chunk of Friday’s big gains.
Various factors supported global bonds. Firstly, the correction on Friday was apparently seen as indeed an end-of-week phenomenon and thus considered as a buying opportunity by some. Later on, risk aversion played a role, as Irish and Portuguese bonds came under further pressure. Moody’s downgraded the Anglo Irish rating by 3 notches to Baa3 and kept a possible downgrade assessment. The health of the Irish banking sector and its impact on the Irish debt situation is a big concern. Markets are also extra nervous as the cost of the Anglo Irish bail out should be made public in the next few days. ECB’s Trichet said that Ireland proved in the past that it could face sizeable fiscal challenges, but added there was a big issue with the “very big financial sector”. Handelsblatt reported that in view of the crisis in Ireland, the ECB debated a plan for activating the EFSF rescue fund, but it was rejected. This seems a bit odd as it looks an issue for the EU political leaders. Regarding Portugal, there are fears that the minority government won’t get support for additional measures to keep finances on track for a deficit reduction to 6% of GDP. In the next days, it should become clearer whether the talks between government and opposition may succeed. As a result Irish and Portuguese 10 year yield spreads widened by 17 and 10 bps to new post EMU highs of 414 and 429 bps respectively.
There was also a lot of talk in the press about the weakness of the German Landesbanken, which might also have favoured core global bonds. The M3 money supply data were intrinsically bond-unfriendly as they suggest lending growth is accelerating, but markets ignored it.
In the US, a similar rebound in Treasuries took place. The global bond positive climate should also here be the main factor, additionally helped by some weaker second tiers eco reports (Chicago Fed National Indicator and Dallas Fed manufacturing survey) and a strong 2-year Note auction.
In the intra-EMU bond market, beside the Irish and Portuguese case (see higher), Spanish and Italian bonds lost ground too and registered a spread widening of 5, 6 bps. In Italy, concerns about early elections are rising. The Belgian debt outperformed the whole sovereign bond universe after a strong OLO auction, allowing the German-Belgian 10-year yield spread to narrow 5 bps. Also in other maturities Belgian debt outperformed German one.
The US eco calendar heats up today with the Conference Board’s consumer confidence indicator, Richmond Fed manufacturing index and S&P CS house prices. In the euro zone, the focus is on inflation with the first estimate of German CPI inflation and the Belgian inflation data. The ECB remains very active with Tumpell- Gugerell, Stark and Liikanen scheduled to speak, while Italy and the US will tap the bond market.
US conference board’s consumer confidence is expected to show a worsening of sentiment in September, after a bigger than expected improvement in August. The consensus is looking for a decline from 53.5 to 52.3, but we believe an downward surprise is not excluded after the recent decline in the Michigan and ABC indicators. The Richmond Fed manufacturing index is forecasted to show a further decline in September. The headline figure is forecasted to decline from 11 to 6, raising expectations that overall manufacturing ISM will fall back in September after an unexpected improvement in August. In July, the S&P Case Shiller house prices are expected to show the first month-on-month decline in four months as the effect from the government’s incentives are forecasted to fade. On a yearly basis, the increase in house prices is forecasted to have slowed from 4.23% Y/Y to 3.10% Y/Y. In Germany, CPI inflation is forecasted to have risen from 1.0% Y/Y to 1.3% Y/Y as last year’s 0.5% M/M decline falls out of the calculation. On a monthly basis however, inflation is expected to have dropped by 0.2% M/M, confirming that inflationary pressures remain extremely low.
The Belgian OLO auction went very well. The Debt Agency sold €2.292B OLOs (March 2016, September 2020 and March 2041), which was above the middle of the targeted range. The bid/covers showed good demand, but partially due to the smaller amounts allotted than in previous auctions. The Belgian OLOs that had cheapened in the run-up to the auction, outperformed other Credits in secondary markets. The US $36B 2-year T-Note auction went very well despite rock bottom low yields. Indeed the auction stopped at 0.441%, below the 0.446% bid in the WI at the stop. The bid/cover of 3.78 was the largest in more than 2-years. The Indirect, Direct and dealers’ bid all improved and the combined buy-side takedown improved to 49.3% from 41.3% in August.
Today, the Dutch Debt Agency will tap its 3.25% July 2015 DSL and 4% July 2018 DSL for an amount up to €2B, while Italy taps its 2.1% September 2021 for an amount of €1-to-1.5B. The US Treasury holds a $35B 5-year T-Note auction that will raise all new cash upon settlement. The success of the 2-year Note auction yesterday is a good omen for the 5-year today. Some commentators refer to the Japanese interventions as a factor underpinning the auction. The flattening of the curve might be a positive for the 5-year, as investors are reaching out for more yield. At least, last month buy-side demand was very strong.
Regarding other news, the ECB bought last week only €134M in bonds, showing that despite the rising tensions in the peripheral bond markets, the ECB doesn’t want to play a big role anymore in stabilizing the market. The WSJ writes that the Fed is weighing a more open-ended, smaller-scale bond buying program compared with 2009. More in particular, the Fed would announce purchases of a smaller amount for some brief period and leave open the question of whether it would do more. The latter would be answered by how the economy is doing. If this would indeed be the solution the Fed chooses, it would mean that the impact on the Treasury curve is less beneficial (smaller decline yields) and especially for the longer end of the curve that was expected to be targeted. The overnight reaction, sharp underperformance 30-year, points indeed to such an effect. However, we would be cautious to read too much in it. We aren’t sure that indeed the debate is involved in that direction. It might be an attempt to test the market reaction.
Regarding bond market trading, we were a bit too cautious yesterday by suggesting a buy-on-dips tactics. The rebound clearly showed that Friday’s correction was nothing more than a healthy profit taking correction. So, our basic bullish view remains on track. However, while we were too cautious yesterday, there is some technical reason to remain cautious today. Both the Bund and the T-Note future are testing the reaction- and contract high respectively. As the market has entered overbought territory, it is not the right time to take additional long positions at current levels. So, while existing longs may be kept, initiating new longs should be done in case of dips or in case these resistances are taken out. From a fundamental point of view, the eco data may be supportive today, month end extension buying may kick in and the US 5-year Note auction may go well. The situation in peripheral Europe is a wild card, but even should the peripherals rebound, we suspect that the negative impact on core bonds would be modest. The WSJ article on QE (see higher) is a potential negative, but might be offset should equities correct lower. So, it will be interesting how the bond market will cope with these factors at a critical juncture technically. It will tell us more on the underlying sentiment and on the possibility that US and German bonds might revisit the historic highs.

Forex − EUR/USD Flows − ratings, risk and a supranational seller

Posted by Usman Ali Minhas on , under , , , , , , , , , , , |



International Trading



Published at 06:58 (GMT) 28 Sep
Forex Market Alerts
Rumours of a Spanish downgrade, S&P threatening further Anglo Irish related downgrades and a sell interest from the usual supranational are pushing the EUR lower. December S&Ps are down alongside though with some questions over which is taking the lead. it all plays to risk off and a further lack of devotion to positions either way, although the recent real money EUR buyers still have a good cushion in hand. PB

USD Extends Gains after Equities Weaken

Posted by Usman Ali Minhas on , under , , , , , , , |



International Trading



Market Brief

Markets were trading in the red this morning, following a weaker close to US equity markets with the Dow closing -0.44% lower. Perhaps the impact was magnified during this Asian session this morning as the Dollar strengthened even further, bolstered by reports that the Fed’s QE measures could be less aggressive then many are anticipating. The Nikkei 225 sold off and was trading -1.14% at the time of writing, and the currency majors were trading flat with a slight negative bias favouring USD.
The USDJPY extended its weakness into a seventh straight day, trading just off the days low. Data released from yesterday showed Japanese exports during August increased less than expected at 15.8%, which marked a sixth consecutive of slower export growth. The number highlights the negative impact the Yen's appreciation over the same time period is having on the economy, and certainly throws more weight behind the BoJ's recent intervention policy. Perhaps the best performer (once again) has been the AUDUSD which hit a new two year high in trading yesterday at 0.9645. The AUD has been prospering against the US Dollar as speculation that the RBA will be raising rates during their meeting on October 5 and general USD weakness coming in from the Fed increasing QE has seen the AUDUSD be one of the best performers of the past quarter.
Looking ahead, we await the release of the Q2 GDP reading from the UK, followed by the Case-Shiller home price index & consumer confidence reading from the US.
Snap Shot
Global IndexesCurrent Level% Change
Nikkei 225 Index9493.72-1.14
Hang Seng Index22314.14-0.12
Shanghai Index2618.38-0.36
S&P future11390.11
DJIA futures107610.1
FTSE futures5555-0.39
DAX futures6285.5-0.25
World MarketsCurrent Level% Change
Crude wti76.12-0.52
Gold1292.7-0.13
Silver21.33-0.42
USD Index79.450.01
VIX22.543.82
Todays CalenderEstimatesPreviousCountry / GMT
German GfK Consumer Confidence Survey4.24.1EUR / 0600
Q2 Current Account (Pounds)-8.2B-9.6BGBP / 0830
Q2 Total Business Investment (QoQ/YoY)-0.842105263-0.842105263GBP / 0830
Q2 UK Gross Domestic Product (QoQ/YoY)1.2%/1.7%1.2%/1.7%GBP / 0830
CBI Reported Sales2535GBP / 0830
S&P/Case-Shiller 20 City (MoM/YoY)-0.0322580650.28%/4.23USD / 1300
Consumer Confidence52.153.5USD / 1400
Richmond Fed Manufacturing Index511USD / 1400
ABC Consumer ConfidenceUSD / 2100

Currency Tech

EURUSD 
R 2: 1.3667 
R 1: 1.3507 
CURRENT: 1.3449 
S 1: 1.3366
S 2: 1.3243
USDJPY 
R 2: 84.88 
R 1: 84.67 
CURRENT: 84.22 
S 1: 84.12 
S 2: 83.72
GBPUSD 
R 2: 1.6000 
R 1: 1.5867 
CURRENT: 1.5789 
S 1: 1.5703 
S 2: 1.5624
AUDUSD 
R 2: 0.9704 
R 1: 0.9647
CURRENT: 0.9583 
S 1: 0.9472
S 2: 0.9361 
  • S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot

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