FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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Risk markets were off to a firm start in the European session, with equities, high-beta FX and commodities rallying. However, sentiment started to unravel with disappointing US housing data showing that the homebuyers’ tax credit (which ended at the end of April) played a key role in supporting home-building activity. While single-family starts of the bounced 5.8% in April permits fell by 11.5% to stand more that 10% below starts. However, the biggest moves in the day came after Germany’s financial regulator, Bafin announced a temporary ban (starting at midnight) on naked short selling and naked credit default swaps of euro area government bonds. EUR/US fell roughly two big figures on the news and remains down 1½% on the day. European FX declined in sympathy with NOK falling roughly 2% vs the USD, in part reflecting the risk-off trade in energy markets. However, while Bafin’s move is cause for concern, we suspect that the volume of positions affected would be small unless regulators elsewhere follow suit. Since Bafin’s decision affects German-domiciled institutions, its main impact likely will be on German banks' ability to hedge their exposures. We suspect that the real money business in Germany would shy away from substantial naked shorts.

The news from EMU funding markets was mixed but on the whole inconclusive today for the direction of risk markets. On the one hand the very low demand for USD liquidity at the ECB’s 84-day tender suggests there is no real cross-currency funding distress with euro area institutions at present. The FX basis may be widening but the lack of emergency demand for dollars from the central bank suggests that the market mechanism is not dysfunctional in the way it was in 2008/09– credit is being supplied albeit at a higher price. On the other hand the demand for Spanish T-bills was pretty weak compared to the previous auction (the cover on the 18-mth bill fell to only 13 vs 2.7 in April). At this stage the ECB’s bid for peripheral debt appears to be acting as more a mechanism to enable existing investors to exit rather than an inducement for new investors to participate. We remain leery of risk assets at this stage, especially as measures of funding pressures in the domestic USD market continue to tick higher (3m Libor +10bp over the past week, 3m OIS spread also +10bp tpo 36bp over the week). Our bias is still to be long USD, short euro and on the sidelines in G10 commodity/high-beta FX.

GBP has continued to underperform today, this latest move sparked by a worrying high inflation print. The market has tended to regard persistent upside surprises in inflation in recent months as a cue to buy GBP on a naive interpretation of what this might mean for nominal interest rates. However, today’s price action suggest that the market is coming around to a more sensible view that high inflation is a currency negative when set against the second most highly indebted private sector in the world (after Spain) and with a government starting to tighten fiscal policy. We remain short GBP/CHF and are awaiting opportunities to reload short GBP/USD.

The Asian economic calendar is bare, with only Australian Westpac consumer confidence the only new data on the slate. As a result we see follow-through on the drop in US equities, which should keep high-beta on the defensive in the Asian and early European sessions. Similarly the BoE’s minutes likely will have little new for markets to hang their hats on after last week’s dovish soundings. from BoE Governor King However, calendar

Overnight news

USD: April housing data underlined again the temporary boost from the ending homebuyer tax credit. Single-family starts ran well above expectations at a 672K annual rate but new building permits fell shaply signalling a turn in starts. Core producer price inflation printed a touch higher than expected at 1% oya, but headline a bit lower at 5.5% oya.

EUR: Germany’s financial regulator, Bafin announces a temporary ban (starting at midnight) on naked short selling and naked credit default swaps of euro area government bonds.

EUR: ECB allotted only 1bn in 84-day USD liquidity (only 6 banks bid). The low take up sends a relatively benign signal for the cross-border funding position of euro area institutions

EUR: There was a sharp rise in rates and decline in cover ratios at the Spanish bill auctions. 12m covered at 1.26 times vs 1.5 in April; 18 mth covered only 1.3 times vs 2.7 in April.

EUR: ZEW survey declines to 45.8 in May from 53 in April, broadly as expected

GBP: Headline and core inflation both 0.2% stronger than forecast (headline 3.7% from 3.4% in March). BoE governor King forced to right another letter of explanation to the Chancellor – the view remains the same, spare capacity will bring inflation down. For once (and rightly) GBP is sold on strong inflation.

TRY: CBRT leaves its policy rate unchanged at 6.5%, as expected.

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

AUD: May Westpac consumer confidence (%m/m, sa) @ 01:30 (JPM: -3%, Prev -1%);

JPY: Mar final IP (%m/m, sa) @ 05:30 (Prev 0.3%)

GBP: BoE minutes (%m/m, sa) @ 09:30

EUR: Mar construction spending (%m/m, sa) @ 10 :00 (Prev -3.3%) ; ECB President Trichet speaks @ 17 :00

USD: Apr CPI (%m/m, sa) @ 13:30 (JPM: 0.0, Cons 0.1); Apr core CPI (%m/m, sa) @ 13:30 (JPM: 0.05, Cons 0.1); FOMC minutes @ 19:00

Overnight price action

FX: EUR fell sharply in afternoon, with EUR/USD briefly trading below 1.22, following Bafin’s announcement of a temporary ban on naked short selling and naked credit default swaps of euro area government bonds. European FX underperformed generally with KRW and JPY the only major currencies to outperform the USD.

FX vol: Vols edged down on the day, with the G7 VXY slipping 14bps

Commodities: Commodities ex precious metals fell broadly in the afternoon’s risk-off trade. WTI back below $70

Bonds: 10Y Gilts +4bp (curve flatter); Bunds flat; Greece 10Y -21 bp (renewed ECB buying).

Equities: US equities quickly reversed their early-morning to end about 1% lower; European indices up by between 0.9% to 3.7%.

Technical View for the day

The current trends continue to accelerate with the USD extending the rally phase while risk sentiment stays on the defensive. Yesterday’s impulsive action and reversal patterns suggest a higher risk of additional follow-through. Again, while the trends are stretched, there is still little evidence of a reversal. As EUR/USD has sustained the break of the key 1.2329 October ’08 low, the focus now turns to the 1.20/1.18 zone for the short term picture. Moreover, EUR crosses maintain the heavy tone highlighted by yesterday’s bearish reversal in EUR/GBP and outside down day for EUR/JPY. Also, note that the current downtrend in EUR/CAD remains firmly intact as prices quickly approach the next line of important support at the 1.2613 low from 2001. This setup is in line with the overall bullish setup for CAD. Again, we continue to see potential for this outperformance trend to extend, as we also sense additional weakness is likely to GBP/CAD.

AUD/USD maintained the weak tone following the failure below the key .9100/.9135 resistance zone. We see an important test at the .8600/.8578 support zone which includes the February low. Again, violations would confirm a deeper retracement and broader topping pattern (double top).

The heavy tone in NZD/USD remains intact in line with this week’s break below the key .7000/.6960 support zone. Again, the short term risks point to a closer test of the important .6807 February low with a growing risk that a deeper decline is underway.

While the sideways action in USD/JPY continues to develop, the heavy tone in cross JPY suggests a higher risk of a deeper retracement. Note that AUD/JPY violated the 80 support area which suggests a closer test of the May lows can develop. Moreover, yesterday’s downside reversal day in GBP/JPY suggests that the 130.02 May low is now at risk

ENDS

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