Yesterday Fed officials triggered a minor bounce in sentiment in the U.S. hours, and overnight the PBoC attempted to dothe same. But looking around the markets, I don’t feel compelled to don the rose-tinted glasses just yet.
In yesterday’s U.S. session, Fed officials were out trying to massage the most recent message from the FOMC that the tapering of asset purchases is on the way. It is clear that some Fed officials take exception to the degree of volatility that the latest FOMC has caused. The Dallas Fed’s Fisher said he was okay with the rise in treasury yields so far, but noted that the market can behave like “feral hogs” at times when it doesn’t get what it wants. The Minneapolis Fed’s Kocherlakota was also out with comments expressing concern if the market reaction continued. Fisher underlined that the Fed was merely “dialing back” purchases. This was enough to send the USD a bit weaker in later U.S. trading hours, but the move was largely erased by the close.
Wild Asian session – PBOC out attempting to shore up confidence
We had quite an Asian session overnight, with an additional meltdown in Chinese stocks of over 5% before a strong bounce materialized toward the end of the session. A PBoC official was out at the time of writing, trying to shore up confidence in the financial markets and liquidity conditions. Looking at a chart of the Shanghai Composite (off from the May high of 2334 to as low as 1850 overnight, or a drop of over 20% in just over 3 weeks of trading), I wouldn’t feel too comfortable with the situation. In banks it appears to be akin to 2008 in the U.S., as money markets are severely disturbed and rates have spiralled out of control in an obvious credit crunch. The regime will no doubt intervene at some point, but the pain suggests financial conditions are dire and will likely feed through to the real economy. On that note, the AUD and NZD will likely remain on the defensive, although a dead cat bounce in Chinese markets on further damage control attempts could mean better levels for fresh shorts.
Looking ahead
Still looking for the EUR/USD to follow through lower below 1.3000 eventually. We’ve had a rather steep move down from the 1.3400+ area, suggesting some risk of a backup into the 1.3200/50 first, but we may also simply continue to melt lower. EU bank equities are showing signs of stress again. This has often been a leading indicator for the EUR/USD. Sovereign spreads are generally at the higher end of recent ranges, particularly for Belgium, where the spread on the 10-year yield to the German Bund has accelerated above 100 bps for the first time since last fall.
On the CHF crosses, please note that the EUR/CHF is toying with the 200-day moving average again from the topside, while the USD/CHF has been interacting with the 200-day moving average from the downside. CHF volatility may pick up here in the near term as these look like key pivot areas. I would think the upside for USD/CHF is the side of least resistance .
Remember that these are the final days for the King-led Bank of England, with Carney to assume the helm next Monday. The EUR/GBP looks very uncertain/dead here, while I’m looking for the GBP/USD resistance to come in at 1.5500 or 1.5600 at the highest - if this morning’s highs don’t contain the pair.
Watch out for U.S. May Durable Goods Orders and the Conference Board Consumer Confidence survey out in early U.S. hours later. The May reading for the latter survey was the highest since February 2008.
Economic Data Highlights
- Japan May Corporate Service Price Index out at +0.3% YoY vs. 0.0% expected and vs. -0.3% in Apr.
- Japan Jun. Small Business Confidence out at 49.6 vs. 48.2 in May
- UK May BBA Loans for House Purchase (0830)
- UK BoE’s King and others to testify to lawmakers (0830)
- Switzerland SNB’s Zurbruegg to speak (1130)
- US May Durable Goods Orders (1230)
- US Apr. S&P/CaseShiller Home Price Index (1300)
- US Jun. Richmond Fed Manufacturing Index (1400)
- US Jun. Consumer Confidence (1400)
- US May New Home Sales (1400)
- US Weekly API Crude Oil and Product Inventories (2030)