FX Daily Planet: London Open

FX Daily Planet: London Open

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View for the day

Without major news and releases, a solid tone in risk markets built in the overnight session, was simply carried into Asian equity markets, though the magnitude of rally (0.7-1.7%) was generally smaller (the major equity indices in Europe and US posted over 3% gains yesterday). However, it’s spill-over into G-10 currency markets was limited and USD and JPY modestly appreciated against other G-10 currencies while EUR underperformed the most. Meanwhile, USD/Asia traded lower with KRW strength (+2.1% against USD) standing out. A slew of Japanese economic releases including CPI and labor market data, on net, printed on a weak note, but did not have much impact in the market (see Overnight News below for details). In the FX vol space, we see a significant downward pressure on JPY-cross vols in the front end; 1-month vols in AUD/JPY is down 1.25vols to 25.5% and 1-month vols in NZD/JPY is down 1.4vols to 24.5%.

In the London session, some major data releases from Sweden will be in focus in deciding whether the Riksbank will hike rates in the coming months or will stay on hold. Q1 GDP, April retail sales and household lending are all due for release. According to our economist, today's numbers will have a significant bearing on our out of consensus call for rate hikes at the end of this year and start of next year. In the New York session, April personal consumption, core PCE deflator and May Chicago PMI are due for release. As stock/bond markets ignored a weaker-than-expected weekly jobless claims yesterday, however, the market impact from these releases should be limited.

Note also that as we approach end of the month, the focus is now shifting to month-end fixes. The indications are that USD should be a major beneficiary given the sharp sell-off in global equities, with EUR likely to come under strong Fixing pressure. Despite the bank holidays in the US and UK on Monday, WM/Reuters will still publish FX fixes up until 18:00, which means that investors will have a Monday benchmark to shoot for as they adjust their FX hedges. Some investors might be willing to take the basis risk vs the Monday fix and start already rehedging today but that's quite a risk for them to run over the weekend. The combination of outsize equity movements and holiday-impaired liquidity thus risks exacerbating the boost the dollar can expect from the month-end rebalancing.

Overnight news

JPY: April nationwide CPI -1.2%oya vs -1.0% consensus and core CPI -1.5%oya vs -1.4% cons; May Tokyo CPI -1.4%oya vs -1.2% cons; April unemployment 5.1% vs 5.0% cons and job-to-applicant ratio 0.48 vs 0.50 cons; April household spending -0.7%oya vs 2.5% cons; April retail sales +0.5%m/m vs -1.0%.

NZD: April building permits +8.5%m/m vs +0.1% in the previous month.

GBP: May Gfk consumer confidence survey -18 vs -16 consensus.

EUR: France’s European affairs minister Lellouche said the euro region’s EUR440bn debt guarantee program marks an “unprecedented” change to the bloc’s treaties, the FT reported, citing an interview.

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

NOK: May unemployment rate (%) @8:00 (Cons: 2.8); Mar AKU unemployment rate (%, sa) @9:00 (Cons: 3.5)

SEK: 1QGDP (%q/q, sa) @8:30 (JPM: 1.0, Cons: 0.9); Apr retail sales (%m/m, sa) @8:30 (Cons: 0.6)

CHF: Apr trade balance (CHF bn) @7:15 (Prev: 2.0); May KOF leading indicator (index, sa) @10:30 (JPM: 2.05, Cons: 2.02)

USD: Apr personal income (%m/m, sa) @12:30 (JPM: 0.5, Cons: 0.4); Apr personal spending (%m/m, sa) @12:30 (JPM: 0.1, Cons: 0.3); Apr PCE core (%m/m, sa) @12:30 (JPM: 0.1, Cons: 0.1); May Chicago PMI (DI) @14:45 (Cons: 61.0); May U. Michigan cons. conf. final (index) @14:55 (JPM: 71.5, Cons: 73.3)

CAD: 1Q Current account (CADbn, sa) @13:30 (JPM: -7.3, Cons: -7.5)

Overnight price action

FX: USD and JPY outperformed the most despite the gain in equities whilst EUR and CHF underperformed the most falling 0.5% against USD.

FX vol: vols under pressure notably in the front end; AUD/JPY 1-month vols down 1.25vols to 25.5% and NZD/JPY 1-month vols down 1.4vols to 24.5%.

Commodities: oil down 0.3% to $74.3/barrel; gold flat at $1210.1/oz

Bonds: JGB yields remained little changed except for 7yr which fell 3bp

Equities: Asian equities in the ascendancy; Nikkei up 0.9% , Shanghai up 0.5%, Kospi up 0.4%

Technical View for the day

The lack of any fresh disturbing news gave risk markets the opportunity to continue working off the oversold market conditions. It is however still highly uncertain how far this relief rally is going to carry, as the whole situation around the sovereign debt crisis with Spain now the main focus, remains very volatile. Yesterday’s breaks above first resistance at 10198/10212 in the DJI and at 1091/95 in the S&P500 is easing the pressure a bit but to really dissolve the general skepticism it would take a break above the 1150 to 1177 resistance zone in the S&P500. Only above the latter risk markets and high beta currencies would be free to reach new highs. As for commodity currencies it would take decisive break below key-supports at 1.2845 in EUR/CAD, at 1.4287 in EUR/AUD, at 1.7724 in EUR/NZD and at 7.8085 in EUR/NOK (76.4 % retracement’s) to indicate a straight resumption of the long-term up-trend. As long as such breaks are not displayed the risk of having only performed a countertrend swing within a broader consolidation persists. EUR/USD has surprisingly lost its down-momentum right above its previous low and shows two failed attempts to surpass 1.2143 which increases the risk of missing another corrective leg up to 1.2735. It however takes a break above pivotal resistance at 1.2470 to confirm the latter. Cable is in this respect one step ahead with good chances to challenge key-resistance at 1.4714 next.

ENDS

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