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FX Spin

Marc To Market's picture




 

The US dollar's gains have been extended against most currencies today, with the Japanese yen as a notable exception. Global equities have followed the slide in North America yesterday.  Bonds, even in the periphery of Europe, are mostly firmer, with the exception of Italy, where there is a certain amount of anxiety ahead the weekend election. 

Turning to the price action, serious technical damage on the foreign currencies is being inflicted.  The euro is falling through the uptrend drawn off last July (Draghi-induced) lows.   It comes in just below $1.3200 today.  The next technical target is near $1.3070-80.  Sterling has been pushed well through our $1.53 target and is now trading at 31 month lows. It has bounced off $1.5130 area, but the $1.5250 area looks set to cap corrective upticks. 

The Canadian dollar is no match for the greenback.  A trend line drawn off the 2011  and 2012 high comes in near CAD1.0230 now.  A push through there can see an accelerated move.  The Australian dollar saw this week's losses extended, but support was again near $1.0225 (seen on Feb 12 too).   The dollar is heavier against the yen and has generally failed to sustain post-G20 gains.  It has not traded below its 20-day moving average since the election was called in mid-Nov.  It comes in now near JPY92.80. 

There are several considerations at work.  The market direction was already mostly in place before the FOMC minutes were released, but the hawkish read of them accelerated market moves.  We disagree with the general interpretation that the minutes increased the likelihood that QE ends early.

Many voices that were picked up in the minutes are not voting members.  It has been well documented in speeches and dissents that a few regional presidents are not strong advocates of QE and would have been quite content it had not been resumed.  With the drag from government becoming more pronounced (see already agreed action and pending sequester), the US economy is likely to expand well below potential.  This warns of the risk of some backing up in the unemployment rate.  We expected QE to continue through Q2 and probably Q3 before possibly tapering off toward the end of the year.

Actions by the People's Bank of China have also spooked the market and sparked a 3% drop in the Shanghai Composite.  It drained CNY910 bln from the money market, well more than expected and a little bit larger than what would have been achieved by a 25 bp hike in required reserves.  It drained via a long-term repo operation, something not seen since last June.  Some observers see this as a tightening of policy and the financials were among the weakest performers. 

However, we suspect the PBOC is being vigilant and draining the excess liquidity in the aftermath of the Lunar New Year holiday and evidence that sales were softer than usual.  Separately, efforts to curb housing loans and limit price increases though the local governments have been extended.   The fact that the government is using specific action targeted to the housing market supports our content that the blunter tool of monetary policy is not being tightened despite the drain.

The euro zone flash PMI was poor.  The manufacturing index slipped to 47.8 from 47.9 and the service index fell to 47.3 from 48.6.  The composite then fell to 47.3 from 48.6.  If there is a bright spot and underscores our recent point about the inability to deduce changes in export performance from short-term/medium term currency fluctuations.  The export component rose to 51.7 from 49.5, which is its best level since May 2011.

Evidence of a slow recovery in Germany continues to mount.  Both of its PMI readings are above the 50 boom/bust level.  Manufacturing improved, but services did not.  In contrast, which is one of our key European themes, the French economy appears to be contracting.  The manufacturing PMI did rise, but is still weak at 43.6 (from 42.9) and the service sector PMI fell to 42.7, the lowest since early 2009 (from 43.6). 

Clearly the risk is that the EC  cuts its French growth forecast from the already stagnation level of 0.4% tomorrow when it updates is forecasts.  France has acknowledged its will likely overshoot the 3% deficit target this year.  It seems its preferred course of action is to be granted another year grace.  However, several countries appear to be pushing against this with Germany in the background.  They include Slovakia, Austria and Finland.

Japan's Prime Minister Abe visits US President Obama.  There may be two may issues on Abe's agenda.  First and foremost beef up regional security.  Second, access US shale.  What has been called the "Asian pivot" and the recent actions by North Korea, means there is much common ground on security issues.  The Abe government is increasing defense spending for the first time over a decade.  Obama may press Abe to participate in the US-led Pacific area trade agreement (TPP).  China is also proposing a regional trade bloc that excludes the US.

 

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Thu, 02/21/2013 - 10:53 | 3263127 Orly
Orly's picture

AUDUSD appears to have made a double-bottom in the 1.023 area, with the second bottom filling in nice and round (H1...).  The bottoms have occurred below a strong Fibonacci level at ~1.031 that should act as firm support should that level be breached to the upside.

There is an up-trend channel on the Aussie Daily being filled that could put the pair back into the 1.067 range.

Lending some credence to this idea is the RBA is not likely to lower interest rates soon and the EuroZone is growing softer with uncertainty each day.  Given a volatile political situaion in Europe (especially Italy...), there may be increasing flows back into Australia as a safer-haven currency.

There is some jibber-jabber about the Kiwi being forced lower by the RBNZ and some in the Australian government have complained that the Aussie is too high...but that's what it is: jibber-jabber.

:D

Thu, 02/21/2013 - 08:34 | 3262632 OldE_Ant
OldE_Ant's picture

It may be that someone finally has realized a few participants need to wake up to reality (that things are at a cliff and have been for some time now).   Bens Shalom crew having pumped the market to new highs means we can endure enother 5-10% market hit to put out the 'new' message.  (The PPT already out their longs and stocking up short now ready to win the next round)

Message from Ben to world:  Last chance for new romance (DOW to 20k, USD cut 1/2)

This could finally be the setup which brings in the NWO.  A large market drop allows everyone with all the cash they've piled up to buy on the cheap once prices drop to previous low levels before they can then resume the FULL out and out pump (i.e a lot of people have been waiting for a market dump before buying in) screwing over longs and shorts in the greatest operation twist they could ever concieve.

I'm skeptical though any real drop will come about.   IF they manage to control this down expect Gold and Silver to take real hits since they will want to punish everyone who has the audacity to stash cash in PMs and to ship even more of it into Eastern hands.   China is ready for the US to fall into it's various financial traps.

Honestly the Western world with it's market schenanigans is simply handing over the keys to the kingdom to the East.   Perhaps this will be a good thing for someone.  But probably not the American people.  Hard to say.   A dollar climb plays cards into the hands of the FED since as others have been suggesting means everyone else can devalue first, markets drop, USD rises, and Ben can have the last buying field day, when everyone else is either out or exhausted.   Set a price on the entire world and then print up the check.

Ah.  Heck any reason to fantasize a realistic retracement of the past 2-5 years (USD up, markets down, commodities neutral) reward savers, look to punish borrowers - then reverse it all JUST at the right time.  

It must still be early and I must still be dreaming.  

More like New crazy highs after they solve the US sequestration and Europe and Japan print up some new money to stuff in the holes of the leaky ship.   Yeah that's the ticket - do more of what makes no sense to anyone and has worked every day for 2-5 years(NOT!).  (The new normal).

End of Line

Thu, 02/21/2013 - 10:17 | 3262992 disabledvet
disabledvet's picture

wow. you really thought about this. have you ever been to East Asia? No? REALLY? Wow...that's a surprise. "The big complaint by the crazy people in charge is that the people aren't moving in the right (Eastward) direction." and that's no bullshit. "a statement worth pondering" i might add. "the people aren't moving in the right direction." hmmmm. anywho i do agree if the best the Fed did was provide "temporary relief" in order to "REALLY lower the boom" i do agree "there will be many opportunities to buy low" with all that cash on the sidelines. what we don't have yet to buy into is an economic recovery worthy of the name. "those weren't Chinese banks" bailed out i might add. Oddly "they were based in Belgium." How ironic a massive diamond heist just occurred there...

Thu, 02/21/2013 - 11:29 | 3263288 OldE_Ant
OldE_Ant's picture

I actually have family in East Asia (including China).  Your right I personally havn't been there, yet.  Opinions differ depending on where one actually goes, who and what one sees.  Those that have spent excessive time in China, Japan, Korea, Singapore/Tiawan have honestly vastly different opinions on the 'East'.

Is there cash on sidelines?  They keep telling us so, so it must be true. Right?  Ben printing and buying like a drunken sailor so someone is getting paid.  But heck all that money (ala DEBT) is just sitting around because it can't find anyone to service it (even at near ZIRP rates).

Most of my post (and many of them now) was out and out sarcasm because I think all players are playing each other.  Eventually all seats will have legs cut out from them.   It's just a matter of short term at this point, not a lot of long term anything out there.

The world economy has CBs stuck in its craw and continued economic constipation is the likely result.  Economic Turbo-Lax being held back for now while the toilets are cleaned.

I always enjoy your posts and perspective d..vet keep it up!

End of Line 

Thu, 02/21/2013 - 08:11 | 3262599 Edward Fiatski
Edward Fiatski's picture

Once again, I agree with you Marc on EUR targets, seems like we'll be seeing a floor at the 200 DMA which is around 1.3070.

U.S. CPI data out @ 13:30 GMT.

Bernanke needs a time off, has to wait for other nincompoops to devalue their respective currencies first, before resuming his printing. :) /waves to ECB/BoE.

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