FX Daily Planet: Sydney/Asia Open

FX Daily Planet: Sydney/Asia Open

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View for the day

The day began with high beta FX down sharply against the USD and JPY, but the sell-off gathered momentum as commodities and global equities collapsed over the course of the NY morning. Adding to the widespread risk asset liquidation, the initial jobless claims report showed an increase of 25k to 471k, considerably more than forecast (there were no comments on special factors from the Labor Department). Despite these moves, EUR began to shoot higher rather suddenly amid chatter of stops being hit, evidencing the large overhang of short positions which has limited downside in that currency over the course of the session. EURUSD shot higher despite the deterioration in risk markets and is currently up about 0.8%, hovering at around 125. Despite this move, the devastation is widespread, with commodities lower across the board, high beta FX down by 2-3% against the USD, JPY rising more than 2% against the USD, and US equities down nearly 4%.

As we have highlighted in recent days, macro data is taking a backseat to developments in the financial markets, and there was little notable data to point to driving these moves. Friday’s focus is on the vote in the German Parliament on the European Stabilisation Mechanism. Note that there is some uncertainty about whether passage can be secured at the first time of asking in the Upper House (Bundesrat). Any initial rejection of the ESM would sit badly with risk markets. Friday also sees European finance ministers meet once more to hammer out technical details of the ESM and to discuss reform to economic governance. This meeting is of additional significance following the unilateral introduction of trading restrictions by Germany this week, a decision which has raised legitimate concerns about the degree of policy co-ordination within the EU. In the mean time, the path of least resistance remains to be short risk assets and long USD and JPY.

Overnight news

USD: May 15th initial jobless claims rise to 471k (000s, sa) (JPM: 440, Cons: 440); May Philadelphia Fed index (DI, sa) comes in at 21.4 (JPM: 21.0, Cons: 21.3)

USD: Senate passes Dodd financial regulation bill, 60-40.

NOK: 1Q10 GDP is softer than expected, with mainland GDP rising only 0.1% q/q

GBP: Retail sales are broadly in line with expectations rising 0.1% m/m.

JPY: 1Q10 GDP prelim. +4.9% q/q saar. vs +5.5% consensus; GDP deflator prelim. in line with consensus at -3.0%oya.

JPY: Foreign investors continued to net sell Japanese equities to the tune of ¥134.3bn for the second consecutive week; Japanese investors net bought ¥594.8bn of foreign bonds after ¥1.57trn of net sales in the previous week while also increasing net purchase in foreign stocks to ¥148.3bn from ¥0.4bn.

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

NZD: May credit card spending (%m/m, sa) @04:00 (JPM: -1.6)

JPY: Leading index final (CI) @ 06:00; Coincident index final (CI) @ 06:00; BoJ rate announcement

EUR: Germany GDP final (%q/q, sa) 1Q10 (Cons: 0.2) @ 07:00; Germany PMI services flash (Index, sa) for May (JPM: 56, Cons: 55.4) @ 08:30; Germany PMI mgf. flash (Index, sa) for May (JPM: 61.5, Cons: 61) @ 08:30

GBP: Business investment prelim (%q/q, sa) 1Q10; Public sector finances (GBP bn) for April @ 09:30; M4 prelim (%oya) for April

EUR: German Parliament to vote on the European Stabilisation Mechanism; European finance ministers meeting

Overnight price action

FX: AUD continues to slide through the session as USD and JPY advance

FX vol: Cross/JPY volatility remains very bid

Commodities: Gold falls by 1%. Oil falls by nearly 3%

Bonds: yields down about 7bp in the front end, down more than15bp in the belly, and down 15bp at the long end.

Equities: Equities down sharply.

Technical View for the day

The broad unwind extended yesterday while pushing closer to the next round of key levels. The action over the past few days has caused some technical damage to the medium term trends while suggesting a growing risk that a broader shift is underway. As we continue to monitor equities and the critical support at the early-May lows, commodity currencies maintain a weak tone, as AUD/USD leads the way. Following this week’s breakdown below the key .8600 support area, the trend has extended in a clear impulsive bias with yesterday’s decline testing the next zone of important support in the .8200/.8155 area (38.2% retracement from ’09 low). While the near term setup can allow for some pause, the short term downside risks will remain intact against the .8500/.8580 resistance levels. The action on the crosses continues to confirm this view as the one-way advance in EUR/AUD remains intact (note the breakout above the March ’09 downtrendline), while AUD/JPY maintains the breakdown below the important 76 medium term range lows. Moreover, CAD/JPY has declined into the critical 83.15/82.40 support area with a growing risk of a downside break. In that regard, the decline in USD/JPY extended yesterday with the focus now on the important 88.60/88 support zone.

We see an important test for USD/CAD, as the rally is once again approaching the important 1.0780/10870 medium term range highs. Again, while due for some pause, there is still no sign of a reversal at this point as the 1.0540/1.04 levels will maintain the short term upside bias.

For EUR/USD, the short term advance continues to develop with yesterday’s impulsive bias approaching key resistance in the 1.2600/1.2610 area. Today’s price action will be key as a weekly close above 1.2358 will confirm an upside reversal week (the first one since early-January and another sign that a short term consolidation phase is underway.

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