Market is happy to put on more risk ahead of the next two day’s event risks, with most currencies higher against the USD while the euro has been slower to rally today.
The market was happy to sing “puttin’ on the risk” and buy riskier currencies and even the JPY against the US dollar today. AUD/USD managed to take out 1.0400 and USD/CAD traded to below 0.9720 on the day, while NZD/USD zipped all the way to 0.8150+ so far. The most interesting technical break on the day so far was USD/JPY, which threw down the gauntlet with a move below the big 78.00 level. With no news of note to go on, one has to assume this is a continuation of Friday’s move to front-run the anticipated QE3 from the Fed and the assumption that tomorrow’s EU-related event risks won’t throw up any roadblocks for the euro.
Something suggests to me that a good portion of this market move across asset classes is still about position unwinding/squeezes rather than a healthier flavour of risk appetite. There is evidence of divergence in several places, including the VIX, where we’ve posted a new high in the averages without a confirming high in the VIX, though some of that could be due to the “known unknown” of the FOMC meeting and options volatility swelling until the outcome is known. So, as with everything else, that indicator is either a red herring or will prove correct post-Thursday.
Dutch election
No huge surprises are expected at the Dutch election, as the likely outcome is for a government that nominally favours a pro-EU stance, albeit one that favours a “critical approach” according to some useful research by Deutsche bank. While the right and left wings of various European countries are flourishing, we’ve apparently not yet reached a sufficient “state of emergency” to shake the centrist tendencies.
German Constitutional court decision
The German Constitutional Court is up tomorrow with its decision on the constitutionality of the ESM. It is widely expected that the court will approve the mechanism, but may ask that all of the German parliament participate in ESM-related decisions, which could mean an unwieldy political process rather than decisive action on ESM disbursements.
USD/CAD: Blow off bottom?
It is worth noting as we head into the key FOMC meeting on Thursday and as everyone is frantically flushing their greenbacks, that the net long position in CAD according to the latest IMM report (which reports positions as of last Tuesday, when USD/CAD was trading well above 0.9800 vs. the 0.9716 it hit today) is at 66.5k contracts, a number that has only been exceeded a handful of times in the last five years – once earlier this year on May 1, during one episode of four weeks in February 2011 and one episode of four weeks in March/April of 2010, and then a couple of bouts above this level in 2007.
On May 1 of this year, USD/CAD was trading at its local low below 0.9900 and launched a torrid rally straight to 1.04+ by early June. In the 2011 episode, there was only a sharp consolidation before new lows while the 2010 episode only saw marginal new lows toward parity before an explosive rally to 1.0700. If the recent euro rally taught us anything, it is that speculative excess positioning eventually does mean something – the question being, when? Note today’s modern record low Merchandise Trade Balance for Canada as well.
Chart: USD/CAD
According to my amateur Elliott Wave assessment (I know I’m inviting an endless hailstorm from EW folks, but here goes), it looks to me like we are in a fifth wave environment here, and if the fifth wave is often meant to have the same size as the first, then we’ve reached target in the low 0.9700’s (yes, alternative interpretations of the wave count could point to other targets, but it’s a possible scenario). Confirmation of this would be a sharp rally back up through 0.9800.
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Looking ahead
We’ll find out what is priced in and what is not as the news hits the wires tomorrow. In the meantime, it’s all about the technical picture and it is interesting to note the divergence in the EUR/JPY and EUR/USD picture at the moment as the JPY is making a statement. Something doesn’t add up here – either the commodity currency strength is “wrong” or the JPY strength is wrong. Stay tuned…
Economic Data Highlights
- US July Consumer Credit fell -$3.3B vs. +9.2B expected and +9.8B in June
- UK August RICS House Price Balance out at -19% vs. -23% expected and -23% in July
- Australia August NAB Business Conditions out at 1 vs. -3 in July
- Australia August NAB Business Confidence out at -2 vs. +3 in July
- UK July Visible Trade Balance out at -£7149M vs. -£9000M expected and vs. -£10,068M in June
- US August NFIB Small Business Optimism out at 92.9 vs. 91.4 expected and 91.2 in July
- Canada August Housing Starts out at 224.9k vs. 200k expected and 208k in ul.
- Canada July International Merchandise Trade out at -2.34B vs. -1.45B expected and vs. -1.93B in June
- US July Trade Balance out at -$42.0B vs. -$44.0B expected and -$41.9B in June
- US Weekly API Crude Oil and Product Inventories (2030)
- Japan July Machine Orders (2350)
- Japan August Domestic CGPI (2350)
- Australia September Westpac Consumer Confidence (0030)
- Australia Q2 Dwelling Starts (0130)