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Market unwilling to make a move ahead of FOMC meeting

US Treasuries sold off heavily yesterday with the much better than expected Philly Fed and the falling continuing jobless claims numbers giving the optimists some hope while the market also eyes next weeks massive auction ($104 billion) of two, five and seven year US treasury notes. The auctions were announced yesterday. The heavy treasury selling and a gentle rally in stocks saw the the usual reaction in the FX market, with JPY crosses up sharply and the USD suddenly struggling back toward support. The ranges held rather well, however, with EURUSD finding a brick wall at 1.4000 once again before selling off all the way below 1.3900 late in the North American session. It appears the market is on tenter hooks ahead of next week’s FOMC meeting, where it appears the Fed will need to send some kind of signal on its view of the market’s rather bold prediction of late that the Fed could move on rates sooner than was previously expected. The market will also be curious how well it can absorb the treasury issuance blitz, as next week’s auction size was likely increased after the success of recent well subscribed auctions.

Particular interest was focused on the strongly falling weekly US continuing claims number, which was down a solid 148,000 from the previous week, the first drop since January. This will give the green shoots crowd some reason for hope, but there is an awful lot of wood to chop before we are likely to see the unemployment rate falling again in the US. The initial jobless claims number needs to drop consistently and the payrolls numbers will need to begin to turn to consistently outright positive levels before we can call a bottom, but this does give hope that the US job market’s deterioration is slowing.

The FT was out with an interesting article about Switzerland’s desire to reduce the size of its two largest banks to reduce the systemic risks posed by their size relative to the Swiss economy. The SNB’s Hildebrand indicated that he hoped to find new international rules for banks, but that the bank might have to take “direct and indirect” steps to limit banks sizes. This story bears watching, as does the SNB’s actual intervention in the market, which was apparently felt in the market yesterday to the tune of yards of francs on the offer after the SNB shot across the bow with strong verbal intervention earlier in the day.

As we have been doing for the past few days, we continue to focus on the ranges within the ranges, as players in the FX market dont seem to want to put many of their chips on the table until key technical and/or event risk thresholds are crossed. See EURUSD techs below. For AUDUSD, the important level comes in around 0.8050 to the upside with focus on the 21-day moving average on the close (the last close convincingly below this level was iin April).

Today’s calendar is very sparsely populated with the rather stale Canadian Retail Sales from April the only data point of note, but it appears that the market may be building energy for a larger move soon, as is often the case when important inflection points are in the offing. On the risk appetite front, we have all eyes on the 200-day moving average of the US S&P500,

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USD hit by BRICs after recent rally.

The USD responded true to its pattern of late yesterday as it strengthened while equities finally took a larger adjustment to the downside. The pressure continued overnight, as the Yen joined the hunt as well. EURUSD touched new lows for the last three weeks. By mid-session today, the USD bulls were on the defensive and the riskier currencies were rocketing higher across the board, with marginal support from equities and lots of support from the commodity complex (especially oil is up sharply on the day.) If commodity prices are strong enough to do their own thing without implicit support from equities, this could certainly be a threat to any USD rally as it likely represents continued strong Chinese buying interest. In any case, the greenback’s reversal here is a disappointment for the USD recovery attempt and the USD bulls really need that 1.3725/00 area to be taken out to make a better case for the USD. The Yen followed largely in the greenback’s footsteps and even outperformed the USD as USDJPY was sharply lower intraday after the Imoku cloud support finally gave out with a bang. Later, the JPY proved its high beta mettle by weakening faster than the USD. One wonders how large the Iranian situation looms ias well.

We’re getting more verbal intervention than ever on the USD, with Japan FinMin Yosano out overnight saying that Japanese confidence in the US debt and currency is “absolutely unshakable”. The Russian finance minister was out doing the same thing yesterday, despite very public declarations from Medvedev that an alternative is needed. It seems the market  is playing this reserve diversification theme despite this rhetoric, with the BRIC meeting today and the speculation that the biggest item on the agenda may be discussions of alternatives to the US dollar. As well, the BRICs are likely to discuss settling trade deals in their own currencies – a key threat to the USD in the long term/  It is clear there is a growing discomfort in the largest holders of USD reserves with its USD holdings. The question is whether the alternatives look any better if risk aversion returns with a vengeance. So far we don’t know the answer to that question as yesterday’s downtick is a one-off downtick unless it is followed up with an extension of the sell-off.

The US PPI ex Food and Energy reading actually dipped into negative territory on the monthly comparisons. There is a rather persistent downward trend developing in the monthly comparisons as well, after years of choppy numbers that were far less trending. This is very interesting in the face of rising risk appetite – is there deflation on the ground that suggests persistent slack demand? The ISM Prices Paid data has yet to rise above the 50 level as well. And yet the media are still talking up hyperinflation and exit strategies – next week’s FOMC meeting is shaping up to be an interesting one.

The US housing starts numbers were better than expected, though we have said in the past that these have become unsustainably low and we are likely to see a basing and even small rebound in these numbers in the coming year. More worrisome is the drop in the NAHB survey, which likely dipped this month as mortgage rates have surged again. The German ZEW survey was far better than expected, but this may simply be an after effect of the large rally in risk since early March that this survey has largely tracked. Looking forward, we wonder if anyone is going to take the noseplugs out long enough to smell the stench emanating from European banks. Even the ECB has been out fretting publicly about the need for more and larger writedowns. Is anyone paying attention?

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USD to trade higher spurred by failing oil prices

The dollar is rising again. This is largely spurred by falling oil and equity markets, but the dollar was also supported by Russia’s Finance Minister, Alexei Kudrin, who said that Russia has full faith in the U.S. currency. However this is still talk – whether this is backed up by action remains to be seen.

The euro dropped against several currencies after the British newspaper, The Daily Telegraph, cited Hans Heinrich Driftman, president of the German Chamber of Commerce and Industry, saying that the nation’s credit conditions are worsening.

The Chambers survey, which is to be released later this week, shows that one third of all large companies are facing tightening credit conditions. This should put further pressure on the ECB to take some action.

The Bank of England may need to print more money to spur growth, the CBI (Confederation of British Industry) said in forecasts published today. We still have negative outlook for the UK economy and if equities continue to fall (as we expect) risk appetite is going to be under some pressure and then the pound will probably weaken somewhat further against the yen.

The GBP has so far been seen as a global recovery story and Forex markets seems to be a little nervous as to whether this recovery is going to happen at the so far predicted pace.

The Lati continues to be under pressure, but for the first time The Latvian Central Bank sold lati. The government is aiming for a 10 pct. budget cut in order to meet the requirements set by the EU and IMF in order to receive further funding.

But the expectation is still to see a contraction of the Latvian economy at 18% this year and this will still incur pressure on the Lati as well on the SEK due to the Swedish banks’ exposure towards The Baltics.

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