FX Daily Planet: New York Open

FX Daily Planet: New York Open

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View for the day

Conditions have calmed down a little from yesterday but risk markets remain exceptionally nervous – stocks were down 2-3% in Asia and Europe – which is feeding continued deleveraging in the FX market. USD/Asia is well bid and the dollar remains in the ascendancy. That said, Japanese retail investors appear to have held their never, such that USD/JPY is marginally higher and cross-yen is treading water. The other main focus was an out-of-hours round of intervention from the SNB which drove EUR/CHF from a trough of 1.4560 to around 1.49 (the exact peak is a matter of some discussion). 1m vols rose by over 1 vol (from a base level of only 4). The SNB appears to be making a habit of intervening at strange times. One interpretation is that it is acting from a position of weakness – it wants to draw a new line in the sand at 1.47 but lacks the appetite for the scale of intervention necessary to break the downtrend (its initial period of intervention last year amounted to 7-8% of GDP – a figure that is clearly not sustainable). Hence it is striking during periods of illiquidity to extract the maximum bang from a limited amount of intervention buck. We are not convinced by this strategy and see continued scope for CHF appreciation against the range of European currencies.

The question today is whether either payrolls or the G7 meeting can underpin investor sentiment? We doubt it. A strong payrolls will tend to be downplayed given the conflicting impression from the higher-frequency claims figures which have risen to a level consistent with no gains in employment. Conversely, a soft figure would merely aggravate fears at a loss of economic momentum. As for G7, policymakers will certainly try to put a positive spin on economic trends and no doubt downplay the severity of the fiscal crisis in the Euro area, and the potential for contagion to countries with even larger deficits. But as was evident with Trichet yesterday, investors are beyond the point at which rhetoric will calm concerns – only hard action to reduce deficits is now being given credit. Meantime, financial markets, especially in Europe, are trying to come to terms with the fall-out from the slump in peripheral bond markets. One thing that the sub-prime crisis taught us is to be alert to unexpected consequences of extreme movements in financial markets. The ultimate risk of these assets can reside in the most unexpected of places and equity markets are busy trying to disentangle the mark-to-market hits to European banks and insures particularly. Our equity analysts believe the current hit to insurers is tiny but the market’s concerns will not be easily allayed.

Overnight news

CHF: EUR/CHF leaps 3 big figures on apparent SNB intervention during Asian hours. 1m EUR/CHF vol leaps 1.1%.

GBP: Core PPI output prices marginally firmer than expected (3.8% vs. 3.7% consensus).

NOK: Norwegian ind prod disappointingly weak (-0.5% Dec vs. 0+.4% consensus).

EUR: German industrial production slumps 2.6% m/m in Dec vs. +0.6% consensus. Likely to be some weather impact but still, a bad piece of data.

AUD: RBA Monetary Policy Statement, showed central forecast for the economy to grow at around 3.25-3.5% in 2010 and 2011 while expecting underlying inflation to continue moderating reaching a low of a little under 2.5% in the 2nd half of 2010 and said “With inflation moderating as expected, interest rates no longer at exceptionally low levels, and relatively little information available as to the impact of the recent increases, the Board judged it appropriate to hold the cash rate steady for the time being.”

JPY: both leading index prelim and coincident index for Dec printed slightly higher at 93.5 vs cons. 94.0 for the former and 973 vs cons. 97.6 for the latter.

JPY: BoJ Deputy Governor Yamaguchi shrugged off a ruling party lawmaker’s call for further monetary easing, saying the central bank has already taken bold steps to combat deflation.

CNY: A Foreign Ministry spokesman said “wrongful accusations and pressure will not help solve this issue (of CNY revaluation)”, reacting to US President Obama’s remark that CNY is kept at an artificially low level to give China an unfair advantage in selling its exports.

CNY: State Administration of Foreign Exchange said China’s current account surplus fell 35% last year as exports accounted for a smaller percentage.

Int’l: French Finmin Lagarde – “The consensus we have is that we all want stability of the currency systems and we all want to avoid by any means volatility and particularly excessive volatility”

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

CAD: Jan unemployment rate (%, sa) @12:00 (JPM: 8.4, Cons: 8.5); Jan employment (ch, m/m 000s, sa) @12:00 (JPM: 25, Cons: 15)

US: Jan unemployment rate (%, sa) @13:30 (JPM: 10.0, Cons.: 10.0); Jan nonfarm payrolls (ch m/m 000s, sa) @13:30 (JPM: 20, Cons: 15); Jan average hourly earnings (%m/m, sa) @13:30 (JPM: 0.1, Cons: 0.2); Fed’s Bullard speaks @22:15

Int’l: G7 meeting (to Feb. 6)

Overnight price action

FX: Risk unwind continues and USD remains in the ascendancy. USD/JPY bounces back above 89. Scandinavian currencies notably weak, as was CHF following an -of-hours drive-by from the SNB.

FX vol: Vols remain super well bid, especially cross-yen aand EUR/CHF following SNB action. 1m AUD/JPY 2.9 vol, 1m EUR/CHF +1.1 vol.

Commodities: Silver -2.4%, gold -1.2%, oil -0.4%.

Bonds: Flight to quality continues to boost high-quality sovereign debt – Bunds -4bp, Tnotes -2bp. Peripheral markets mixed – Greece +9bp, Spain -2bp.

Equities: Europe follows Asian down by 2-3%

Technical View for the day

The renewed sell-off in risk markets is almost a logical consequence of the key-reversals we have seen in major-stock market indices last month as such strong reversal signals almost never fail to generate follow-up in form of new lows afterwards. The more exciting question arising now is whether decisive T-junctions at 1043 in the S&P500, at 5025 in the FTSE 100, at 5494 in the Dax, at 1.3735/00 in EUR/USD or at 1.5709 in Cable can be defended. A failure to do so would more or less open Pandora’s Box as it would rip the downside wide open for a broad consolidation based on the whole accumulation phase starting in March last year. That said the 50 % retracement in stock market indices (i.e. 909 in S&P500) would be the next bigger target whereas EUR/USD would face a decline into the 1.31 handle and Cable into 1.5275 once the mentioned key-supports would give way. With key US data releases in the pipeline, today could really turn out to be judgment day for risk markets.

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ENDS

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