Aussie

Anticipation of Fed tapering is being cited for both dollar gains and dollar losses.  What gives?

Short-term, dollar risks still appear on the downside, but this appears largely corrective in nature.  Medium-term, a higher dollar still appears to be the most likely scenario.  

It seems I arrived in New Zealand just in time to see the country implode over a bit of botulism and bad PR. Good thing I haven't converted all my dollars into kiwis just yet!

Discussion of recent and prospective price action in the foreign exchange market.

UPDATE: China HSBC PMI prints 47.7 - same as Flash - for worst 4-month decline in 3 years

Following Japan's disappointing PMI last night, and after some 'hope' in June,  Aussie PMI collapsed from an almost 'recovering' 49.6 to 42.0 with only 1 in 12 industries expanding and production, employment, and new orders all falling further into contraction. Then came a formerly consistent bellwether of the global recovery (until of course it started to fall when it became irrelevant) - South Korea's PMI tumbled to 47.2 (from 49.4) - its lowest since Sept 2012 (and falling for the 3rd month in a row) and employment down the fastest in 17 months. Then after the early Flash HSBC PMI printed at 11-month lows (final HSBC PMI shortly) and firmly in contraction, China's official PMI just arrived at a perfectly 'reasonable' 50.3 (highest in 2 months) and well ahead of a contractionary 49.8 expectation. Remember this is the same data whose subsets were temporarily (and then permanently) removed last month. This is the widest disparity from HSBC's measure in 15 months.

Overview of currency market outlook.  

Bernanke's comments washed out some late dollar longs and they may be reluctant to re-establish ahead of the Chairman's testimony before Congress at the end of next week.  The underlying bullish case for the dollar remains intact.  

Increasing concerns over deflation will limit any QE tapering in the second-half and set the stage for bonds to outperform stocks once again. 

Brief discussion of the price action that is lifting the dollar at expense of nearly every other currency.  

• Egypt on the edge after Mursi rebuffs army ultimatum (Reuters)
• Inside China's Bank-Rate Missteps (WSJ)
• Obama Urges Morsi to Respond to Protesters' Concerns (WSJ)
• How Fed’s 7% Jobless Avoids Deterring Bondholders Is Mystery (BBG)
• Obama Joins With Political Foe Bush at End of Africa Trip (BBG)
• China may introduce deposit insurance by year-end (China Daily)
• China’s Slowdown Could Slam Hong Kong (BBG)
• Government 'to ask Rothschild to advise on RBS split' (Telegraph)
• Martin Feldstein: The Fed Should Start to 'Taper' Now (WSJ)

Think gold and silver were the worst performing financial asset in June? Think again: that dubious distinction falls to the Bovespa, the Shanghai Composite and the Greek stock market index, all of which tumbled more than the precious metal complex did in the past month. Yet what an odd month for hard assets - on one hand WTI, Corn and Brent were the best performing assets, while gold, silver, copper and wheat tumbled.

Near-term outlook for the major currencies discussed and a brief analysis of the short-coming of fair-value "discounting" models in understanding recent price action.  

With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal. China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps. This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows). On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.

The global capital markets are seeing large moves in response not only to the Federal Reserve, though clearly that is a key impetus, but also to developments elsewhere. Here is a dispassionate review.

Tryingto make sense of the price action in the foreign exchange market.  The dollar was heavier than we anticipated and there is no compelling sign of a turnaround, but the key is the FOMC meeting.