FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

Risky markets continued to move higher with US equities making strong gains in excess of 1% and commodities markets moving higher by nearly 4% in the case of oil and 2.5% in the case of gold. In the FX market, both NZD and AUD remain today’s strongest currencies among the majors, up nearly 1.5% each With few sound bites on the situation in Greece during New York trading, the EUR managed to stage an impressive 1% rally against the USD and finds itself among today’s strongest currencies as well.

Canadian newspapers are reporting a change in mortgage rules designed to prevent an overheating housing market. The new rules would require all borrowers to meet standards for a five-year fixed-rate mortgage, even if the buyer wants a variable rate mortgage. Other rule changes unveiled would affect people looking to refinance their mortgages - lowering the maximum amount that can be withdrawn to 90% from 95% - and place a 20% minimum down payment for government-backed mortgage insurance on non-owner-occupied properties. This shift follows concerns that the housing market is starting to bubble over. Will the change delay BoC policy tightening? We suspect not, and maintain call is for the BoC to start hiking in July. The housing market and leverage, while a cause for BoC concern, are not key policy drivers. BoC Governor Carney has said before that the BoC will not make monetary policy aimed at one sector of the economy alone and that these should be addressed with regulation. Despite this, on the margin, this shift should ally market worries about an earlier housing-driven rate hike. We don’t expect this development to be a significant driver of relative value within commodity FX in the medium term.

The US session featured a few notable economic releases today. The Empire manufacturing survey came in at 24.91, above consensus expectations of 18; however behind the positive headline number, details showed a large drop in new orders and shipments, which was enough to push the ISM weighted composite lower to 52.3 from 53.5. Separately, the NAHB increased 2 points to 17, a tad better than expected with both the single family, and future sales sub-indices increasing slightly as well. Tomorrow is a very light data day in the Asian session, with only the tertiary sector activity index from Japan. Barring additional turbulence from Greece headlines, the large positioning imbalance reflected in a highly oversold EUR has resulted in rising USD longs and should permit this short term bounce in risk correlated FX to continue in the near term.

Overnight news

USD: Total net foreign purchases of long-term securities in December were $63.3bn, about half of November's $126.4bn.; The Empire manufacturing survey came in at 24.91, above consensus expectations of 18; however behind the positive headline number, details showed a large drop in new orders and shipments, which was enough to push the ISM weighted composite lower to 52.3 from 53.5; the NAHB increased 2 points to 17, better than expected.

CAD: Canada Dec Manufacturing shipments increased 1.6% m/m vs 1.8% expected and a 0.1% print in November; Autos & parts and aircraft account for much of the bounce in Canadian manufacturing sales.

GBP: January CPI printed in line with expectation with headline at 3.5%oya and core at 3.1% (consensus: 3.2%). This, however, deviates more than a percentage point from the BoE’s inflation target and prompts the governor King to write to Chancellor of the Exchequer Darling setting out his plans to return to the goal.

GBP: In the letter to Chancellor of theExchequer Darling, Governor King said short run factors including the reversal of the temporary VAT rate reduction, oil price rises of around 70% over the past year and the effects of GBP’s depreciation have caused inflation to rise over 3.5% in January. Thus, he insisted that he supports the MPC’s inflation outlook of 1.75% in 4Q 10 with the upward pressure being temporary.

EUR: Feb ZEW survey current situation prints weaker at -54.8 vs. consensus -53.0 while economics sentiment is much stronger than at 45.1 vs. 41.0.

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

JPY: Dec tertiary sector activity index (%m/m, sa) @23:50 (JPM: -02, Cons: -0.3)

Overnight price action

FX: AUD and NZD strengthened the most, with both currencies up nearly 1.5% vs. the USD; The EUR is also among today’s strongest currencies, up more than 1% in afternoon trading.

FX vol: vols are under pressure in the short end.

Commodities: Oil is up nearly 4% and gold is up nearly 3%.

Bonds: Yields are lower by 3-4bp in the short end, and about flat farther out the curve.

Equities: US equities are up 1-1.4%.

Technical View for the day

The short term corrective phase for the USD extended yesterday in line with the better action in equities and commodities. Once again, the commodity currencies led the way with both AUD and NZD extending above key resistance levels against the USD while maintaining the bullish bias on the crosses. While our short term themes remain intact, the price action in the commodity currencies has demonstrated a better tone particularly following the breakout in NZD/USD above the key .6995/.7020, as well as the .8920 area for AUD/USD. In turn, the risks for a continuation of the broader consolidation phase have increased for both pairs. This is already evident for USD/CAD following the reversal from the key 1.0750/80 resistance zone. While we see potential for the commodity currencies to maintain the overall outperformance bias on the crosses, we sense some initial pause is likely as the short term trends look overdone and are quickly approaching the next line of important levels. Note that EUR/AUD seems close to completing a five-wave decline from this month’s high with the important 1.50 support area in striking distance. Also, EUR/CAD has hit an oversold extreme while suggesting some initial pause. As mentioned in the latest FXMW, we will look to corrective retracements to establish longs in AUD and CAD on the crosses. With regards to the European currencies, yesterday’s action developed a better spin with the sharper rally against the USD. Still, the key levels remain intact highlighted by the 1.3850 area for EUR/USD and the 1.5850 zone for Cable. As such, we continue to hold short positions. The two-sided action in USD/JPY remains intact as yesterday’s failure above the January downtrendline suggests a continuation of the range bias. Still, the lift in the crosses has developed a bullish bias while suggesting additional short term retracement particularly for AUD/JPY and CAD/JPY.

ENDS

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