The USD moves over the last 24 hours have contrasted with the normally negative USD/risk appetite negative correlation as the concern for the USD is that the Fed may be ready to replace Operation Twist with more aggressive easing.
Yesterday’s weak US ISM Manufacturing survey (just below 50) put a damper on the risk rally as equities sold off virtually all day in the US session, but this didn’t put much, if any support in place for the US dollar. The euro rally extended yesterday due to on-going impressive reductions in EU tail risks as expressed in the latest moves in the peripheral bond markets. The Spain-Germany 10-year spread came in 9 bps yesterday, for example.
RBA
The RBA cut rates as expected to 3.00%, matching the lowest level the cash target has been in. The aussie rallied a bit, perhaps in a simple, sell the rumour, buy-the –fact kind of reaction, as there was little guidance to hang our hats on, and in the moves in the interest rate curve offer no real support for an aussie rally, which will have to rely on other factors if it is to extend. Remember that the RBA is passively intervening already and mention of the currency’s strength continues even if the tone isn’t particularly aggressive.
Aussie rallies are likely to fizzle quickly from here on out. The weak current account data for Q3 out overnight is a reminder that Australia’s position is very fragile. Yes, it has a higher interest rate in a world of money printers, but the country’s stock of debt is overwhelmingly owned by foreigners and the accumulated current account deficit is enormous while the currency is overvalued. This will matter someday – but apparently not for now.
Chart: EUR/JPY
EUR/JPY pushed to new highs recently as the harder money approach of Europe and tail-risk reduction contrasts with new political developments in Japan and the opposition’s hopes to devalue the JPY once the LDP presumably wrests back control of the government after the mid-December election. But technicians are likely noting the divergent momentum (higher prices with lower momentum readings) that could have been avoided had the pair followed up with sharper gains, rather than the more cautious probe higher we have seen thus far. It’s time for EUR/JPY to either push higher now or risk a period of consolidation back to the 105.50/104.75 area in the next couple of weeks.
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Looking ahead
Today, the EU-27 finance ministers are meeting in Brussels – look for ad hoc headline risks.
The European approach of writing off Greek debt rather than printing money or monetizing it is in such contrast to the US Fed’s behaviour and prospects for it continuing to monetize US fiscal shortfalls, and this is the background driver of the EUR/USD rally in an environment of complacency. The Fed is certainly winning the competitive devaluation game, with Shinzo Abe trying to put Japan in the devaluation vanguard.
It’s hard to imagine that the dollar and risk appetite can fail to hold their traditional negative correlation day to day as we have seen over the last 24 hours, but let’s see where we stand on the other side of next Wednesday ‘s FOMC meeting. It appears the dovish FOMC scenario shaping up is one of outright long bond purchases while the more neutral to hawkish scenario is one in which the Twist is merely extended.
Last night, the Boston Fed’s Rosengren stated the case for massive monetization. Meanwhile, the St. Louis Fed’s Bullard said that converting to outright purchases from the Twist could aggravate inflation. Neither of the two is a voting member at the coming meeting.
Today, we have nothing interesting out of the US in an otherwise busy week of US data, where we await the US ISM non-manufacturing survey tomorrow. But we do have a Bank of Canada meeting today. USD/CAD volatility died a long time ago, so let’s see if anything unexpected happens – we won’t hold our breath. Parity is the psychological pivot for the pair.
Economic Data Highlights
- US November ISM Manufacturing out at 49.5 vs. 51.4 expected and vs. 51.7 in October
- US November Domestic Vehicle Sales out at 12.01M vs. 11.5M expected and vs. 11.1M in October
- UK November BRC Sales Like-for-Like out at +0.4% YoY vs. +0.9% expected and -0.1% in October
- Australia October Building Approvals out at -7.6% MoM and +14.5% YoY vs. -1.6%/+20.2% expected, respectively and vs. +14.3% YoY in Sep.
- Australia Q3 Current Account Balance out at -14.9B vs. -14.55B expected and -12.37B in Q2
- Australia RBA lowered Cash Target 25 bps to 3.00% as expected
- UK November PMI Construction (0930)
- Eurozone October PPI (1000)
- Canada Bank of Canada Rate Announcement (1400)
- US Fed’s Tarullo to Speak (1545)
- US Weekly API Crude Oil and Product Inventories (2130)
- Australia November AiG Performance of Services Index (2230)
- Australia Q3 GDP (0030)
- China November HSBC Services PMI (0145)