FX Daily Planet: New York Open

FX Daily Planet: New York Open

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View for the day

Sterling has been the main story during the European session as the market digests the UK election results. At the time of writing, the Conservative Party have 291 seats with the Labour Party on 251 seats and Liberal Party on 52 seats. The projection leaves the Conservative Party just short of an overall majority (326 seats). GBP has consequently suffered marked losses across the board whilst 10yr Gilt-Bund spreads have widened to their highest levels since 1999, and with political jockeying likely to continue over the weekend the vacuum at the heart of British government is likely to weigh further on the pound. We have this morning decided to open a short GBP/USD position.

Despite a raft of data during the session, economic data releases have played a secondary role in price action during the session. Greece continues to dominate markets with both the Italian and German government agreeing aid packages. Sovereign CDS has widened further for the Southern Med, whilst equity markets have continued to slide across the board. As a consequence FX volatility is sharply higher across the front-end of the curve, particularly for cross/JPY. Despite the equity meltdown in Asia which has followed through into the European session, JPY is down sharply across the board. Overnight, the Bank of Japan commented that it would pump 2trn yen into financial institutions via emergency money market operations. Following extreme pressure on the Yen crosses during the NY trading session, the news that the G7 will hold a conference call on the Greek situation has seen some profit taking on JPY gains with EUR/JPY recovering 3% on the day.

For the record, there is a significant data release from the US in the shape of payrolls. However, given the volatility in financial markets, it is debatable how much of an impact this number will have. The risks are certainly asymmetrically skewed though. If our more bearish-than-consensus call on payrolls (JPM +145K vs cons. +190K) proves to be correct, it should accelerate investors’ risk aversion and favor JPY and USD. Meanwhile, even if it comes in at the strong side of expectations, it’s unlikely that it will boost the sentiment in risk markets; note that, economic releases in the past week were generally strong but failed to lift risk markets.

Overnight news

SEK: Industrial production is stronger than expected, rising 4% m/m.

NOK: Manufacturing production is in line with expectations at +0.4%m/m

GBP: Halifax house prices are weaker than expected, falling 0.1% m/m. PPI mixed with input prices softer and output prices stronger.

EUR: German industrial production is stronger than expected, rising 4% m/m. German and Italian governments agree on aid package for Greece

AUD: In its quarterly Statement on Monetary Policy (SoMP), the RBA upgraded the GDP growth and core inflation forecasts by 25bp across most of the forecast horizon. The RBA expects the economy to grow by unchanged 3.25% in the year to December 2010, but by an upgraded 3.75% in the year to December 2011; the RBA raised by 25bp the published core inflation forecasts for the year ended June and December 2010.

JPY: The BoJ said that it would pump 2trn yen into financial institutions via emergency money market operations, which would be the first same-day repurchase operations since last December.

JPY: Finance Minister Kan said Group of Seven nations will discuss Greece’s fiscal woes in a conference call today; he said he didn’t think members will be asked to take any specific policy action such as currency intervention.

JPY: Prime Minister Hatoyama said he is “very concerned” about the fiscal crisis in Greece and “The government will take all measures needed”.

JPY: Chief Cabinet Secretary Hirofumi Hirano told reporters that the government supports the aid package for Greece being put together by the euro region and the IMF.

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

CAD: Apr unemployment rate (%, sa) @12:00 (JPM: 8.1, Cons: 8.2); Apr employment (ch, m/m 000s, sa) @12:00 (JPM: 20.0, Cons: 25.0)

US: Apr unemployment rate (%, sa) @13:30 (JPM: 9.8, Cons.: 9.7); Apr nonfarm payrolls (ch m/m 000s, sa) @13:30 (JPM: 145, Cons: 190); Apr average hourly earnings (%m/m, sa) @13:30 (JPM: 0.1, Cons: 0.1); Fed’s Plosser speaks on economic outlook in Delaware @17:30

Overnight price action

FX: GB suffers across the board as election results point to hung parliament.

FX vol: Cross/JPY vol is sharply higher

Commodities: Oil rises 1.5% whilst gold is marginally lower.

Bonds: European bond futures are mixed. Credit spreads continue to widen. Gilt-Bund spread widens to its highest levels since 1999

Credit: European high grade widens 5bps; high yield crossover widens 26bps

Equities: European equities are lower but recover from their lows.

Technical View for the day

Investor nerves are stretched to the limit as there seems to be no relief in this ongoing sovereign debt drama. Market action is now clearly dominated by panic reactions as the late dramatic sell-off in US stock markets illustrates. It is however remarkable that the S&P500 at least defended a potential neckline at 1059 which can be seen as the last support before Pandora’s Box would have been opened A break and daily close below the latter would deliver the final evidence that a much broader risk consolidation based on the whole accumulation phase since March last year is unfolding, what could easily last for 9-12 months in total. The EUR in the meantime has again experienced landslide losses and is already approaching former lows at 1.2458 and at 1.2329, followed by a Fib.-projection at 1.2245 and the 50 % retracement at 1.2134 to name the next obvious targets. While the USD has been functioning as a safe haven currency for some time now, it was the JPY who gained the most across board in yesterday’s market turmoil. Next to the EUR it is the British Pound though which could be tested next as fears are slowly increasing that the UK might also come under increased pressure concerning its sovereign debt problems. The break of cable below key-support at 1.4970/57/49 has already sent a clear warning signal and opened the downside for a minimum decline to 1.4339.

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ENDS

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