The currency market has a lot to busy itself with this week, with the FOMC and a “QE4” likely in the wings on Wednesday, followed by a possibly pivotal SNB meeting on Thursday and then Japan’s election over the weekend.
The news out of Italy late Friday and over the weekend was the main focus in Europe today, as Monti’s plan to resign and Berlusconi throwing his hat back in the ring has Italian yield spreads sharply wider this morning – by more than 25 bps for 10-year debt vs. Germany as of this writing. If you missed it yesterday, please see our Chief Economist Jakobsen’s notes on the situation in Italy and Europe.
The euro managed to stabilize a bit this morning around the 1.29 level versus the USD. One possible reason we’re not seeing a further weakening in the euro at the moment is that the single currency already saw a mini-meltdown late last week, and as well, it’s hard to find a good reason to buy any other currency for the moment, with a new bond buying programme almost certain from the FOMC announcement on Wednesday, the new, supposed JPY-slaying political change in the wings for Japan after this Sunday’s election, and then weak data out of China overnight even flashing a warning signal on AUD. What’s a currency trader to do?
IMM report: AUD positioning extremes. Lighter Euro shorts
AUD longs got even longer last week, according to the latest weekly round of US futures data, as the net AUD position was the longest ever by a small margin, having accelerated from a net 40k contracts long back in mid-October (and v. -50k contracts short back in early June) to a net 92+k contracts. For the mathematically challenged, that’s a lot of aussie – making the US futures market alone long over AUD 9 billion against the US dollar.
The 1.0500 level also remains effectively “untaken” after the weak attempt above that level late last week. Obviously, we need to get the Wednesday FOMC meeting out of the way, but AUD is ready for a trip lower soon as these kinds of positioning extremes have historically come close to – at least local – market tops.
In other positioning news, it is worth noting that the JPY short built further to a new five year high of 111k contracts (note that the extremes of 2006-2007 were far more significant at more than twice the size of what we’re seeing at the moment). And Euro shorts continue to leave the building (as of last Tuesday’s cut off for the CFTC report, at least) as the EUR net position vs. the USD shrank from -67k to a 2012 low of about -33k.
Looking ahead
A busy week ahead, with the FOMC meeting up on Wednesday. The consensus expectation is for a bond-buying programme to replace Operation Twist, with 45 billion per month (the current size of the Twist) as the baseline scenario, with anything less than that perhaps seen as dovish. With the fiscal cliff unresolved.
The question is at what point the market decides/realizes that monetary policy is not having any traction in the real economy any more, or whether that even matters when all of the liquidity injections long ago stopped being about the real economy and only about a confidence game for assets.
Elsewhere, we have the SNB meeting on Thursday – could the SNB be ready to move the peg after months of not having to intervene in EUR/CHF to maintain 1.20? Or will the latest acceleration of tail risks keep them cautious and mute, in hopes that the market and the still fresh news of negative deposit rates at Credit Suisse will begin to see the market move further away from the peg on its own accord?
Also on Thursday, we have a Spanish bond auction of medium to long term bonds, which will garner considerable interest after last week’s weak auction.
Then there’s the election in Japan on Sunday, but more on that as the week progresses.
Economic Data Highlights
- China November CPI out at +2.0 YoY vs. +2.1% expected and +1.7% in October
- China November Producer Price Index out at -2.2% YoY and -2.0% expected and -2.8% in October
- China November Industrial Production out at 10.1% YoY vs. +9.8% expected and 9.6% in October
- China November Retail Sales out at +14.9% YoY vs. 14.6% expected and +14.5% in October
- Japan October Adjusted Current Account Total out at ¥414B vs. ¥247B expected and -¥142B in September
- Australia October Home Loans rose +0.1% MoM vs. +3.0% expected
- China November Trade Balance out at +$19.63B vs. +$26.85B expected and +$32.05B in October
- Japan November Consumer Confidence out at 39.4 vs. 39.7 in October
- Japan November preliminary Machine Tool Orders out at -20.7% vs. -6.7% in Sep.
- Germany October Trade Balance out at +15.8B vs. +15.5B expected and +16.9B in Sep.
- Sweden October Industrial Production out at +0.5% MoM and -4.4% YoY vs. 0.0%/-5.2% expected, respectively and vs. -5.0% YoY in Sep.
- Norway November CPI out at +0.1% MoM and +1.1% YoY vs. +0.2%/+1.3% expected, respectively and vs. +1.1% YoY in October
- Canada November Housing Starts (1315)
- New Zealand November REINZ Housing Price Index (1700)
- New Zealand November Card Spending (2145)
- New Zealand November QV House Prices (2300)
- UK November RICS House Price Balance (0001)
- Australia November NAB Business Conditions/Confidence (0030)