Archive - Jun 23, 2011 - Story

Risk-aversion remained the dominant theme during the European session on the back of the ongoing Greek debt concern, allied with worse than expected manufacturing PMI data from core Eurozone countries like France and Germany. This resulted in weakness in European equities, which provided support to Bunds, and also observed widening of Eurozone 10-year government bond yield spreads across the board. In the forex market, strength in the USD-Index weighed upon EUR/USD and GBP/USD, whereas weakness in commodities exerted downward pressure on commodity-linked currencies. Moving into the North American open, markets look ahead to key economic data from the US in the form of jobless claims, Chicago Fed and new home sales. In fixed income, 2-, 5-, and 7-year Note refunding announcement, another Fed's Outright Treasury Coupon Purchase operation in the maturity range of Aug'21-Nov'27, with a purchase target of USD 1-1.5bln, and USD 7bln 30-year TIPS auction are also scheduled for later.

About a week ago, Goldman Sachs closed its tactical short USDCNY Non-Deliverable Forward trade, which was opened on June 10, 2010 and which expired a year later for a 4.2% gain. Goldman added: "Our view has not changed. The necessary adjustments to global imbalances demand a weaker US Dollar, and especially so vs the CNY. The cyclical and political backdrop remains supportive along those lines. Moreover, we expect $/CNY depreciation to continue/extend in the months to come. We remain positioned for the theme via our $/CNY NDF recommended Top Trade with longer initial maturity, expiring on 4 December 2012." Nonetheless, something appears to have shifted in the derivative CNY market, where as Bloomberg points out, it now costs more to bet on RMB weakness than strength. It adds: "China appears headed for a hard landing as the country’s housing market shows more signs of weakness. Currency traders have reduced their expectations for more appreciation of the yuan versus the dollar in the derivatives market, meaning they expect Chinese policy makers to fundamentally shift their approach to the currency due to economic softening. Other markets may soon follow currency’s lead." As the attached chart shows the USDCNY 3 Month 25 Delta Risk Reversal for the first time since September 2009, there appears to be some outright bearishness on the renminbi appreciation scenario. Does this mean that yesterday's decline in the official fixing rate to 6.4736 on Thursday, lower than the record high of 6.4683 on Wednesday is more than a one time adjustment and is the start of a new trend? We will find out soon enough.

Another slow day on the economic docket, with just C-grade indicators like Initial Claims and New Home sales due, which means that more gossip, innuendo, and outright lies out of Europe and Greece will determine the direction of the EURUSD, and thus the Russell 2000, better known as the US economy.

The European Central Bank President, Jean-Claude Trichet, was not as optimistic as he usually is, when he raised the alarm level on the debt crisis to “red” late yesterday. After the meeting of the European Systemic Risk Board in Frankfurt, Trichet who chairs the ESRB, said that risk signals for financial stability in the euro area are rising and flashing “red”. He said “on a personal basis I would say yes, it is red”. Trichet warned market participants that the crisis is nowhere close to be resolved. Trichet warned of “potential contagion effects across the union and beyond.” Overnight Marc Faber, publisher of the Gloom, Boom & Doom report, told Bloomberg this morning (see interview below) that he still favours gold and silver. He said there could be short term weakness but that he will keep accumulating gold. Faber warned against shorting the precious metals as they are likely to keep going up. He also warned regarding recent incidents of fraud and corruption by newly listed Chinese companies and said this was indicative a bubble. In his usual contrarian and witty manner, he said that “not to own any gold is to trust central bankers and that you do not want to do in your life.”

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
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