Both the UK and Sweden yesterday reported weak inflation numbers, with the latter tilting into outright deflation in headline terms and near the lowest level in a decade in core terms. SEK was absolutely hammered as this came just ahead of a key resistance level, and there was effectively no liquidity in EURSEK for several figures as the pair rushed higher and may be on the road for a test of the 9.00 level at minimum in the weeks ahead, particularly if we get an increase in the anticipation of a Fed taper, which tends to squeeze the least liquid currencies the hardest. Note that in a historical perspective, EURSEK’s old trading range was between 9.00 and 9.50.
Chart: EURSEK weekly
EURSEK suddenly knocking on the door to 9.00 as it looks at possibly closing this week at the highest level since early 2012 in what looks like a major break of the recent range. Note the old trading range pre-financial crisis of 9.00 to 9.50.
Aussie not impressed with plenum
The much anticipated third plenum after China’s leadership change has failed to impress thus far. There is mention of the importance of the market’s role in the Chinese economy, though the influence of the party must stay strong. Good luck with that. In any case, if market forces have anything to do with China’s future, we’re going to see a drastic curtailment of the commodity-intensive infrastructure and property building that has characterised especially the last 10 years of China’s growth model — and this is being felt most intensely in FX by AUD at the moment, as AUDUSD has dipped close to that final support zone around 0.9275/50 ahead of the 2013 lows well below 0.9000.
Looking ahead:
BoE Inflation Report
Traders have fallen all over themselves to get out of long GBP positions ahead of today’s Bank of England (BoE) inflation report after the very weak CPI print yesterday that has seen the deflation meme spreading. Governor Carney needs to come out with fairly optimistic language/forecasts on the UK economy and importantly, no mention of the risk from the exchange rate, to give sterling a boost. Some are speculating on the BoE’s speculation about the timing of the raising of interest rates — but I fail to understand why the BoE would want to forecast this at this time besides using the vaguest of language. Also, will Carney make mention of the UK’s most alarming fundamental — its very large trade deficit?
The timing of this BoE event risk is interesting as it comes after GBPUSD has broken lower and after EURGBP has ripped higher more sharply than one would expect from a “normal” consolidation. I still lean toward EURGBP tilting back lower again unless Mark Carney proves particularly cautious on his wording. As for GBPUSD, a break is a break (of the 1.5900 area support — let’s see where we close the week) until proven otherwise, and this one could move sharply lower on further unwinding of GBP longs. A sharp rise back above 1.6000 and close above that level post-Yellen is needed for bulls to garner fresh hope.
Yellen to make first big appearance
Janet Yellen will be heard by a Senate committee tomorrow as a part of her confirmation hearings and the market will be picking over every phrase as this is her first real appearance since President Obama nominated her to replace Ben Bernanke as Fed chair. The main focus will be on Yellen’s attitude toward the possibility and timing of a Fed taper. We recently had some Fed members trying to argue that “tapering is not tightening”, a clear attempt by the Fed to try to manage expectations and one that has largely failed if we look at how the market reacted back to Bernanke’s comments from late May, when tapering was first mentioned.
If Yellen repeats the 'tapering is not tightening' meme in any way, shape or form, this will be seen as relatively hawkish, while any attempt to back off this message and suggest that asset purchases will continue only once data has improved sufficiently would be seen as dovish. I’m also curious how she would deal with intensive questions from Democrats on the inequality risks of the Fed’s quantitative easing policy (i.e., that it enriches the top one percent and makes life worse for the masses). So far, the left side of the aisle has been surprisingly quiet on this. Yellen’s discussion of the severity of the risk of deflation is another area of interest.
The major USD crosses may wait for the other side of Yellen’s testimony to make a move either way. I would suspect any USD negative move has legs, though there is certainly the possibility of a kneejerk move lower if Yellen proves dovish on the taper. (This could trigger the “first up, then down” scenario I outlined in yesterday’s chart video.
Stay careful out there.
Economic Data Highlights
- Australia Nov. Westpac Consumer Confidence rose to 110.3 versus 108.3 in Oct.
- Japan Oct. Domestic CGPI out at -0.1 percent MoM versus +2.5 percent YoY versus -0.2 percent/+2.5 percent expected, respectively and versus +2.3 percent YoY in Sep.
- Spain Oct. CPI (0800)
- UK Oct. Jobless Claims Change (0930)
- UK Sep. Employment Change (0930)
- UK Sep. Average Weekly Earnings (0930)
- Euro Zone Sep. Industrial Production (1000)
- UK Bank of England Inflation report (1030)
- US Fed’s Pianalto to Speak (1345)
- Canada Oct. Teranet/National Bank Home Price Index (1400)
- Sweden Riksbank Governor Ingves to Speak (1700)
- New Zealand Oct. Business NZ Manufacturing Index (2130)
- New Zealand Q3 Retail Sales (2145)
- Japan Q3 Preliminary GDP (2350)
- New Zealand Nov. ANZ Consumer Confidence (0000)
- US Fed’s Bernanke to Speak to Town Hall (0000)