Asset markets have ripped higher again on the strongly supportive rhetoric from Carney and Draghi yesterday – will the US employment report spoil the party or can we maintain the sugar high for another while longer?
European asset markets caught a strong bid from the Draghi and Carney rhetoric at their respective meetings yesterday. These good feelings spilled over into the Asian session as the world tries to get feeling good about central bank support. It feels more than a bit late in the ball-game for this, and Kyle Bass would apparently agree with this sentiment – Zero Hedge ran one of his most recent letters about a visit to Japan and his concerns for risk asset markets in general due to the Chinese situation and as CB activism is gaining less and less traction. I’m sure Mr. Bass wouldn’t agree in a longer term sense, but I am starting to get interested in correction scenarios in the JPY crosses – such as the one mentioned yesterday for USDJPY. I will wait until after the US employment report today to flesh out my thoughts there – stay tuned.
Yesterday’s BoE/ECB meetings saw a one-two dovish punch, as Carney made a bit more of a splash than the markets anticipated by specifically talking down the market’s anticipation of rate moves out the curve (and by taking the step to issue a statement at all, which was not the policy under King). And the ECB’s Draghi emphatically abandoned the “no pre-commit” stance of the ECB by vowing that that interest rates would remain low or lower for an extended period.
EURGBP wasn’t sure what to do on the news, as it first shot higher all the way to above 0.8630 on the BoE developments before seeing about half of its gains taken away by the ECB’s guidance – a close above 0.8600 needed to get the rally back on track, or well below perhaps 0.8525 to suggest that downside risk is higher. One must say that Draghi’s performance, in particular, was more bark than bite, as it was obvious that he wanted to avoid the impression of a “tight money” stance after the June 6 debacle. But going forward, is this really enough – we’ll need to see either more “walk the walk” from the ECB (only one more interest rate cut likely, then it is on to QE/LTRO’s/etc., or else…) or more worry at the periphery for the Euro to continue much lower beyond a few days of selling on this development. I prefer the downside in EURGBP eventually, but technically, it isn't there yet.
Looking ahead
Look out for Swiss reserves data and the CPI shortly thereafter this morning – the CHF feels a bit “Too quiet” these days. USDCHF continues to make progress unwinding that enormous backup from above 0.9800 to below 0.9200. A strong close today and for the week would offer strong support for the view that the lows are in and that the pair is finally coiling for a move to parity and higher in the coming weeks/months. A reversal after yesterday’s gains on a surprising US employment report outcome, meanwhile, would suggest a possible test back lower first towards 0.9350/0.9400 – but still looking for the eventual upside resolution in the big picture (see chart below).
Chart: USDCHF
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It’s theoretically all about today’s US employment report, where I the largest surprise compared to where the market is trading would be a short fall in the payrolls and an unemployment rate that ticks up a notch – this is because the market seems to be looking for a strong-ish report today. The question is whether market reactions make any sense: a strong report is ironically bad for risk assets and might be JPY positive as it is risk negative due to the increased odds of Fed asset purchase tapering, while a weak report could see a bizarre celebration of risk appetite because it supposedly means more central bank gravy. Perfectly in line data might be the most interest scenario to, because it would tell us where market sentiment is without the support of numbers to drive the near term action.
Also watch out for Canada’s employment report today after yesterday saw the market running at weak stops just below 1.0500. The USDCAD pair looks well supported, but a particularly unfavourable outcome of strong Canada data and weak US data could test the pair’s mettle towards lower support before we see a rally continuation further out.
Economic Data Highlights
- Australia Jun. AiG Performance of Construction Index out at 39.5 vs. 35.3 in May
- Switzerland Jun. Foreign Currency Reserves (0700)
- Switzerland Jun. CPI (0715)
- Sweden May Service Production (0730)
- Norway May Industrial Product Manufacturing (0800)
- Germany May Factory Orders (1000)
- Euro Zone ECB’s Coeure to Speak (1030)
- Canada Jun. Unemployment Rate (1230)
- Canada Jun. Net Change in Employment (1230)
- US Jun. Change in Nonfarm Payrolls (1230)
- US Jun. Unemployment Rate (1230)
- US Jun. Average Hourly Earnings and Average Weekly Hours (1230)
- Canada Jun. Ivey PMI (1400)
- Japan May Current Account Total (2350)