USD Overextended: Faces Event Risks This Week
MarketPulse | Nov 10, 2014 06:57AM ET
It’s a new day and a new week; nevertheless, the overextended U. S dollar ‘long’ positions remain under pressure on this Monday morning, mostly in the wake of the slightly disappointing non-farm-payroll print last Friday. Historically, the first North American session after the jobs release is usually the quietest day of the month, which should give any battle scared investor reasonable enough time to licks their wounds and regroup. The low octane start appears to be more risk averse ahead of the Veterans Day holiday tomorrow. Global markets are likely to be quiet ahead as some U.S investors would prefer to take to take today off to bridee a four-day weekend.
Friday’s post payrolls saw US 10 Year’s yields finish the week near they lows (+2.29%) and provide good enough reason for investors to lock in profits on USD longs. Despite the dollar squeeze lower, the overall market trend remains intact – bullish on the “mighty” buck – with many sideliners preferring to fade U.S short-term weakness. However, be aware this market has the potential for further immediate risks, particularly for one or two currencies like USD/JPY to sub-¥113.00 and Aussie to $0.8765 mostly on the back of these lower U.S yields. The surprise, gold remains better bid this morning, above $1,171 after rising by its biggest margin since June 18th on Friday.
On the U.S data front
From a U.S perspective it’s a relatively light week on the fundamental side, but there are some key consumer numbers releases. U.S retail sales has been relatively volatile, mostly on the back of auto sales and gas prices. Employment growth has been moderate at best stateside, and this week’s JOLTS report will indicate whether there is improvement in job openings. Despite the sluggish recovery (albeit the best of a bad lot), the U.S consumer sentiment has somewhat improved mostly due to stable labor market conditions. Whether the trend continues will be seen in this coming week’s early reading on November consumer sentiment. Finally, initial jobless claims have been trending downward and this week’s number could be potentially be another market eye opener.
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Market events across the Atlantic
Next Wednesday is dominated by the U.K, with average earning reports, claimant count, while the BoE’s Governor Carney is due to hold a press conference, along with other MPC members, about the Inflation Report also being released earlier that day. The report will be closely studied for hints of when the BoE will increase interest rates – Governor Carney has now fallen behind Ms. Yellen on the first developed rate hike. U.S fixed income traders are trying to price in a hike by the end of H1.
For the rest of Europe, flash third quarter gross domestic product data will be reported and analysts will be looking to see if the Eurozone grew at all or whether ECB’s Draghi will have a sleepless early December before the next rate meet. October consumer price data will also be looked at for signs of a pickup in prices – “disinflation, then deflation, then ruination,” obviously the Euro-cycle that Draghi and company are trying to break.
China remains to the fore this week
The world’s second largest economy released its own spate of economic data for October over the past weekend, starting with consumer and producer price indexes and finishing with trade figures. The global disinflationary theme remains in focus; China inflation is soft with CPI matching 5-year lows while PPI registers another month of decline. Later in the week investors get a heads up on retail sales and industrial production.
On Sunday, China released October’s CPI, the +1.6% matched the lowest level in four-years as food component rose +2.5% and non-food up +1.2%. The year-to-date headline was unchanged from prior month just above the +2% level. The Producer Price Index decline of -2.2% is the 32nd consecutive decline and not surprisingly, it’s been attributed to global oil price drop and overcapacity.
The Trade figures released marked a beat on the surplus and exports side, but growth in the imports component was less than expected. The BoC report reflected that “trade surplus was driven by the contraction in growth of imports, domestic demand remains weak, and de-stocking this year has led to decline in consumption of cement, coal, iron ore and other raw materials.” With softer data like this the market has be regionally concerned. Nevertheless, at the APEC summit, China’s President Xi address stated that while the economy “shifted to a slower, more stable rate of growth, economic risks are not that scary”. Xi remained optimistic that “for the Asia-Pacific and the world at large, China’s development will generate huge opportunities and benefits and hold lasting and infinite promise.”
China continues to seek out stronger trade ties with the west and North America. A new Sino-Canadian currency hub will be based in Toronto. The hub is expected to foster easier trade between the CAD and the CNY, bypassing the dollar payment system. It makes Canada the first country in the Americas to have a deal to trade in the renminbi.
Catalonia is ‘no’ Scotland
The Scottish independence vote was a boon for Capital Markets volume and volatility. It seems that the Catalonian independence question in Spain carries much less weight. The Euro peripheral markets are trading better after Sunday’s citizen’s consultation (referendum) in Catalonia, which showed over +80% of the voters favoring independence. The participation rate was +36.3% or +2.2m individuals (plenty remaining for a swing vote). Regardless of yesterday’s results, expectations still appear to lean towards voters shying away from independence in “any” official vote, especially when the Spanish court blocked a formal referendum on independence.
On the radar this week:
- 1. Central bank of Russia (CBR) – they have ditched the trading band in an effort to promote more two-way RUB trade action.
- 2. The 18-member single currency again is expected to be strangled by a plethora of option deals coming off this week: Monday – €2.22b at €1.25 and €3.2b at €1.2450, Wednesday €1b at €1.2500 and Thursday €2.6b at €1.2500.
- 3. Pressure is mounting on EUR/CHF ahead of November’s 30 SNB gold referendums. The cross has fallen to a fresh 26-month low of €1.2024 this morning. A decision that the SNB should increase gold reserves will temporary see the psychological CB defended €1.2000 be broken.
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