FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

What a day. The unexpected decision by S&P to cut Greece's sovereign rating by 3-notches to BB+ (sub-investment grade) and Portugal’s rating to A- sent markets reeling in morning trading, and the S&P plummeted several percent in the hours that followed. The EUR, which had already lost significant ground in overnight trading continued to push lower, and is down about 1.5% against the USD in afternoon trading. Greek CDS also exploded higher by more than 100bp to a new record. Of particular concern in the wake of the downgrades is the eligibility of Greek government bonds for the ECB's refinancing operations. The ECB's collateral rules state that debt is eligible for funding so long as the minimum rating from any of the 3 agencies, S&P, Moody's, and Fitch, is above BBB- or equivalent With S&P's downgrade of Greek debt, the emphasis is now firmly on Moody’s and Fitch. Downgrades from these agencies seem imminent, meaning that the ECB would have to address the eligibility of Greek banks to access current refinancing. In the mean time, and in the presence of lingering uncertainty, the path of least resistance for the EUR is lower. All while FX markets unravelled, Goldman Sachs executives testified before the senate, with few notable developments to speak of, but plenty of headline-grabbing comments from both sides. Amid the chaos, today actually featured a set of very strong economic data. Consumer confidence rose 5.6 points to 57.9, better than forecast and the highest since Sep 08. The present situation index increased to 28.6 from 25.2, the expectations index improved to 77.4 from 70.4, and the labour market differential narrowed from -42.3 to -40.2. In addition, the Richmond Fed Manufacturing index increased an amazing 24pts to 30, much better than expected. The details of the report were very positive as well with the new orders index moving higher to 41 from 10 in March, and the employment index moved to 13 from 0. Tomorrow’s focus will be the FOMC statement. We expect the statement to signal more optimism on growth but dovishness on inflation, a combination which would warrant no change in the Fed’s extended period language nor a decision to sell assets.

Overnight news

USD: The 2y note auction yielded 1.024%, which was 1.5bp cheap to pre-auction levels with a bid/cover of 3.03.

USD: Feb S&P/CS HPI (%oya) 0.64% (JPM: 1.2, Cons: 1.3); Apr consumer confidence (index, sa) came in at 57.9 (JPM: 53.0, Cons: 53.5)

USD: Goldman Sachs executives are testifying before the Senate Permanent Subcommittee on Investigations at time of writing, with few notable developments to speak of.

EUR: S&P cut Portugal to A-, outlook negative, and cut Greece to BB+.

EUR: Spain sells EUR0.94bn in 3mth bills @ 0.549% versus 0.334% in the previous auction. Spain also sells EUR1.7bn in 6-mth bills @ 0.549% versus 0.334% in last auction. Bid/cover are lower for both compared to previous auction: 3.3 for the 3mth (4.3prev) and 2.1 for the 6mth (3.2prev)

SEK: March PPI is much softer than expected, falling 1.5%m/m.

GBP: April CBI Distributive trades survey rises to a five month high of 17.

Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)

USD: Aflac releases 1Q10 earnings @Aft-Mkt (JPM: 1.300, Cons: 1.319)

JPY: Mar retail sales (%oya) @ 00:50 (JPM: 3.2, Cons: 3.6)

AUD: CPI (%q/q, sa) for 1Q10 (Cons: 0.8, JPM: 0.8) @ 02:30

NZD: NBNZ business confidence (Indeex) for Paril (JPM: 44)

SEK: Unemployment rate (%) for March (Cons: 9.5) @ 04:00

EUR: ECB’s Tumpel-Gugerel speaks in Madrid; ECB’s Mersch holds event to review Financial Stability; Germany HICP prelim (%oya) for April (Cons: 1.2)

PLN: NBP rate announcement for April @ 13:00 (JPM: 3.5, Cons: 3.5)

CAD: House price index (oya) for April (Cons: 1.2)

USD: FOMC rate announcement for April @ 19:15 (Cons: 0.25, JPM: 0.25)

NZD: RBNZ rate announcement for April (Cons: 2.5, JPM: 2.5) @ 22:00; Trade balance (NZ$, mn) for March (JPM: 400) @ 23:45

Overnight price action

FX: USD, JPY gain across the board.

FX vol: Vols are higher across the board.

Commodities: Gold is sharply lower, by nearly 5% in afternoon trading.

Bonds: Yields are lower by about 10bp in the short and long end, and by nearly 15bp in the belly.

Equities: US equities are lower by more than 2%.

Technical View for the day

The risk-unwind accelerated throughout the day with the equities reversing impulsively lower and the USD extending the recent gains through a number of important short term resistance levels. With equities still vulnerable to additional weakness, the short term risks point to additional unwind. In that regard, the DXY has broken out of the recent range and with new highs for the medium term rally phase with the focus turning to the 83.20/83.70 zone. Similarly, yesterday’s bearish outside down day in EUR/USD seems consistent with additional downside follow-through which should allow for a closer test of the critical 1.3090/1.30 area, if not the 1.28 zone particularly on the back of continued sovereign credit risks.

Yesterday’s JPY outperformance did not fit with the overall bearish view while suggesting a higher risk of a corrective phase particularly given the impulsive reversal in the crosses. This week’s failure to sustain new highs for the likes of AUD/JPY and CAD/JPY is in line with additional downside follow-through. Note that both are quickly approaching the next line of key support highlighted by the 91.07 uptrendline for CAD/JPY, as well as the 84.30/83.70 zone for AUD/JPY. These levels should hold to argue for a quick return to the underlying trend. However, yesterday’s action points to a higher risk of a downside break. Importantly, note that EUR/JPY violated key cloud support that has persisted through the month. Yesterday’s reversal in USD/JPY argues for additional corrective work as well which clearly did not fit with our view for another run, if not break of the recent highs. In turn, the action suggests this broad range below the 95 resistance area is likely to continue.

In line with yesterday’s USD strength, the commodity currencies took a hit with a break of several key support levels. AUD/USD violated the recent range lows implying at least a short term bearish shift and deeper pullback into the .9080, if not the critical .9000 area. Moreover, the early-week strength in NZD and false breakout against the USD and JPY is in line with additional short term weakness as prices have shifted back into the recent ranges. Also, yesterday’s advance in USD/CAD took on a more impulsive bias suggesting a higher risk that a corrective phase is underway. Note that the 1.0217 high from last week will confirm a deeper retracement.

ENDS

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