Bank of Canada on tap today - cut or no cut? AUD under pressure once again on weak Retail Sales

04 December 2007

Bank of Canada on tap today - cut or no cut? AUD under pressure once again on weak Retail Sales.

Bank of Canada may cut rate rates to prevent another round of scary appreciation of the loonie.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

*

UK Nov. BRC Retail Sales monitor says Retail Sales rose 3.1% YoY, as discounting increased revenues.
*

Australia Oct. Retail Sales out at 0.2% vs. 0.6% expected
*

Australia Oct. Building Approvals out at -2.8% vs. -2.0% exp., but Sep. approvals revised up 1.8%


THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

* Norway PMI (0800)
* UK Construction PMI (0930)
* EuroZone Oct. PPI (1000)
* Bank of Canada announces rates (1400)
* US ABC Weekly Consumer Confidence (2200)
* Australia RBA Cash Target (2230)
* Australia AiG Performance of Service Industries (2230)
* Australia Q3 GDP (0030)

Market Comments

Plenty of market focus on the Bank of Canada today. As we mentioned yesterday, the market is almost exactly 50/50 on whether we'll see a 25 bp cut from the BoC. The data has been a bit mixed of late, but a very weak recent Retail Sales number and low inflation data from Canada may be enough of a green light for a cut. The BoC clearly wants to avoid another round of extreme appreciation of the loonie. In any case, one would suspect plenty of action in USDCAD after the decision. A cut might lead to USDCAD testing the old low above 1.0325.

US Treasury Secretary Paulson was out yesterday outlining a possible plan for mitigation of subprime loan rate resets in an attempt to bail out some of the lenders and stabilize the subprime market. For excellent commentary on this issue, see Caroline Baum's latest column on bloomberg.com. Her commentary helps show why building any equity market rally (or rally in risk appetite in general) based on "the US govt to the rescue" on subprime is a very feeble proposition indeed.

Many market commentators are pointing out that with the tremendous trend we have seen this year in the USD, many funds and others out there will look to deleverage into year end, as speculative short USD positioning has been quite extended. This possible end-of-year deleveraging would be supportive of the USD and could explain why the USD is not really reacting negatively to widening rate differentials that should be causing more weakness, all other things being equal.

The GCC summit is not living up to its hype so far as currency issues were apparently not on the agenda yesterday. With oil prices off USD 10 from their recent highs, will the gulf powers try to duck the issue for now to "see what happens " down the road?

The US Fed's Yellen joined the parade of more dovish Fed rhetoric yesterday as she said she saw signs of very sluggish consumption and bigger risks to growth than she saw previously. Although she is not a voting member on the FOMC, she is considered influential. The market is looking for significant, but less than 50% odds, for a 50bp cut on 11th Dec.

US ISM Manufacturing data out yesterday was exactly as expected at just above 50, and therefore just above the level that divides expansionary from recessionary manufacturing activity. The more important number for the overall US economy this week will be the ISM Non-manufacturing - released tomorrow - which is still expected to come in well above 50. If we are going to see a recession in the US, that number will need to fall more..

On the risk aversion trade, we've been looking for a strong continuation of the JPY cross sell-off, and haven't really been seeing it. Could this also be due to end-of-year factors and a market that has been endlessly frustrated in trying to see a bigger unwind of the carry trade?. Uncertainty levels are rising as these carry trades can't make up their minds for now it seems. Of course, if equity traders dive for the exits again, we could have a story there ...

Charts: AUDUSD and GBPCHF

AUDUSD: Further signs of a bit of deceleration in Australia overnight as Retail Sales came in far weaker than anticipated. The market may further unwind expectations for a rate hike (currently priced for early next year) on further data weakness. Watch for the GDP data tonight. On the AUDUSD chart, it appears that the battle lines are drawn. The first attempt lower through the head and shoulders formation, with neckline at 0.8750, resulted in no follow through. Instead, we've seen a rangebound market capped by the 55-day SMA. This chart needs to resolve soon, with either a break of the sub 0.8700 lows or a rally through the 55-day SMA. We prefer an eventual downside resolution, but we may need to see an outright market pricing of rate cuts from the RBA before we see a bigger AUD unwind. AUD will also be very sensitive to any further unwind in base and precious metals and equity markets.



GBPCHF: Here's an interesting play for those looking for a rate cut from the BOE on Thursday. GBPCHF was rather overextended to the downside and has seen a sharp rally from the lows. While there's a bit more room until the "final resistance" area provided by the old low (2.3500-ish), the near-doji candle yesterday is showing signs of uncertainty as GBPCHF may soon be ready to resume the sell-off.

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Central Bank Bonanza kicks off this week with BoC, RBNZ, ECB, and BOE announcements all on tap

Forex Market Update, 03 December 2007

Is it time for risk averse positioning again? Key resistance levels approaching on the carry trades.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

*

China Nov. Manufacturing PMI out at 55.4 vs. 53.2 in Oct.
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Australia Nov. AiG Performance of Manufacturing Index out at 53.8 vs. 53.3 in Oct.
*

Japan Q3 Capital Spending rose 3.4% YoY vs. 3.3% in Q2
*

Australia Oct. Trade Balance out at -2983M vs. -1800M expected and -1916M in Sep.


THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

* Switzerland SVME PMI (0830)
* EuroZone Nov. PMI and Individual member country Manufacturing PMIs (starting 0845)
* EU ECBs Trichet to speak (0930)
* US Fed's Rosengren to speak on subprime issue (1300)
* US Nov. ISM Manufacturing (1500)
* US Fed's Yellen to speak in Seattle (2030)
* Australia Oct. Retail Sales and Oct. Building Approvals (0030)

Market Comments

The USD finished the session very strongly on Friday, but the strength smelled a bit of end-of-month fixing factors and then stop-triggering on Friday rather than any new fundamental developments. In fact, as we discussed Friday, interest rate differentials continue to favor the USD even weaker, and we'd like to see a correction there before hopping aboard the move in USD strength beyond the shortest term here... The 1.4715 area is the key short term resistance for EUR/USD. EURUSD is tough to call lower for the moment if we glance at the rate differential trend of late, even if the short term technicals suggest that we have seen a technical break here. CAD and AUD are also looking vulnerable against the greenback, particularly if we get a technical follow through on the charts there.

Having a look at the data from Australia overnight, it would seem that expectations for tightening from the RBA early next year may quickly fade -and AUD may be very vulnerable here as gold price reamin under pressure. Imagine that Australian trade balance if commodities see a sharp correction on global growth fears... We have a look at AUDCHF in the Charts section below as a possible way to play for a weaker AUD unit.

The Bank of Japan's Fukui was valiantly trying to talk up the prospects of further rate tightening overnight, but it's questionable how much the market believes him and odds for a rate hike at the Dec. 20 announcment are very low. In any case, Fukui's rhetoric was the excuse given to the JPY strengthening overnight, and the JPY crosses may be ready to fall once again - not on a hawkish BoJ, but due to the prospects of a renewal of the risk aversion trade, which has much further to go in the big picture, we fear.

This week sees a host of Central bank meetings - the most interesting perhaps being the Bank of Canada announcement tomorrow - as the a 25 bp cut is an approximate 50/50 proposition as USDCAD trades at the fulcrum of 1.0000. Considerable movement may be seen in either direction depending on where the hammer falls. We look for a cut as the Bank may want to make a statement to the market after the scary appreciation of the loonie before its recent sell-off.

The other interesting announcment will be from the Bank of England on Thursday - here the market is leaning for a cut, as it definitely should. The Times Shadow MPC was out this morning, with 3 members looking for a 50 bp cut and 1 even looking for 75 bps! Although the GBP crosses got a boost on Friday after a strong CBI report and a BOE expressing two-sided risks, the short GBP trade may be worth putting on again versus the likes of CHF and EUR this week as we've seen significant consolidation there. GBPUSD is also interesting as it approaches the 55-day SMA just above 2.0500. In other central bank news, the ECB is not expected to move on Thursday, nor is the RBNZ on Thursday (Wed. evening European time), but we should of course note hints in the rhetoric.

The other main focus for the week will be the US data, with the ISM manufacturing index today (a weak number could be disappointing for the view that US manufacturing should find strength on a weaker USD), the ISM Non-manufacturing number mid-week. This is ahead of the key US employment report, which could be very weak assuming the usual statistical manipulation doesn't warp the results...

Watch the GCC summit for announcements on currency pegs as well!

Chars: AUDCHF and USDJPY

AUDCHF: We saw a significant, sharp bounce in this carry trade last week as equity markets regained their footing. But with Australia seeing poor data overnight and gold selling off, this trade may be ready to resume the downtrend. Note that the bounce stopped right at the 0.382 Fibo retracement. Risk of further upside would come if equity markets continue higher.



USDJPY: It looks like Fibonacci-ists were having a busy night, as the USDJPY rally last week was stopped exactly at the 0.382 Fibonacci level and ahead of the "final" resistance area around 111.60/80. Minor support comes in at 110.45, a close back below 110.00 could mean that the sell-off is ready to resume.



You can read the risk warning at www.saxobank.com/analysis/disclaimer.

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Bernanke comments possibly threaten the USD rally as rate comparisons could put pressure on the greenback.

Forex market update 30 November 2007

Bernanke comments possibly threaten the USD rally as rate comparisons could put pressure on the greenback.

Bernanke not as dovish as Kohn, but December rate cut looks a certainty - some now calling for a 50 bp cut. BOE says it is in a tough spot on inflation and growth.

MAJOR HEADLINES – PREVIOUS SESSION

Overnight developments:

*

Japan Oct. Jobless Rate out at 4.0% as expected
*

Japan Oct. YoY Overall Household Spending out at 0.6% as expected
*

Japan Nov. Tokyo CPI out at 0.3% as expected
*

Japan Oct. National CPI out at 0.3% vs. 0.1% expected, but ex Food and Energy CPI out at -0.3% as expected.
*

Australia Oct. Private Sector credit up +1.0% vs. 1.1% expected
*

Australia Q3 Current Account Balance out at -15.6B vs. -16.4B expected
*

Japan Oct. YoY Housing Starts out at -35.0% vs. -36.3% expected
*

Switzerland Q3 GDP out at 0.8% vs. 0.7% expected
*

Switzerland Nov. CPI out at 0.5% vs. 0.2% expected
*

Germany Oct. Retail Sales out at -3.3% vs. -0.4% expected


THEMES TO WATCH – UPCOMING SESSION

Key event risks today (all times GMT):

* Norway Oct. Credit Indicator Growth (0900)
* EuroZone Nov. CPI estimate (1000)
* EuroZone Q3 GDP (1000)
* EuroZone Nov. confidence indicators (1000)
* EU ECB's Tumpel-Gugerell to speak (1030)
* UK Nov. GfK Consumer Confidence Survey (1030)
* US Oct. Personal Income, Spending and PCE Core (1330)
* Canada Sep. GDP (1330)
* US Nov. Chicago PMI (1445)
* US Oct. Construction Spending (1500)
* US Fed's Kroszner to speak (1840)
* US Fed's Poole to speak (2100)

Market Comments

The FX market is sending a very mixed message here, as we have seen a bit of scrambling of themes of late. On the one hand, equities have launched a tremendous relief rally, at least partly fed by the prospects of further Fed easing in the immediate future. Bernanke's comments last night were not quite as dire as Kohn's, yet his focus on the uncertainty of the "current stresses in financial markets" suggests that he will be in favor of the 25 bp cut that the market has already priced in for the Dec. 11 Fed meeting (in fact, the market has moved into giving reasonable odds of a 50 bp cut at that meeting). "Current stresses", indeed, as the spread between, for example, US 3-month libor and the 3-month US t-bill has widened to 216 basis points yesterday - a level not seen since the 1987 stock market crash. This is a very ugly sign of panicky illiquidity and credit evaporation. Junk bond spreads are also showing credit stress.

At the same time, however, EM fixed income spreads have tightened over the last few days, and other credit measures have eased off a bit as well - and the stock market has decided to line up at the rate-cut punchbowl for now, so the risk-willing trades have enjoyed a few days in the sun. EM has rallied sharply to erase the recent short squeeze and the JPY has sold off again on stronger global equity performance. We prefer to recognize the risks of the other warning signals that are key market inputs and suspect that this move to higher risk appetite will not extend much farther. This would suggest an eventual turnaround to the downside again for the JPY crosses and EURCHF.

The GBP got mixed news yesterday, with the housing market showing clear signs of turning south, but the CBI report showing a resurgent consumer and heady inflation levels. The BOE member comments to parliament suggests they feel they are in a tough spot, as there were both growth and inflation risks. King stated: "certainly compared with the very small movements we've seen in the last 10 years, this looks like a very sharp slowdown." Yet inflation worries may be high enough to prevent any move in the near term on rates, and GBP may therefore avoid the sell-off extension we've been anticipating for the very short term - though the longer term case remains.

Certainly for the USD, the risks remain that we could see another leg of selling if we look at rate comparisons. We have been pulling for a USD rally in recent days, but the CB rhetoric has not been supportive at all and the market continues to price even more aggressive easing by the Fed. Certainly wait for technical breaks before selling USD. Beware that end of month fixing factors could cause exaggerated/erratic moves today.

Next week certainly looks important, with the GCC summit and possible depegging announcements, the BOE and ECB meetings, and a look at US payrolls data and ISM readings. The trend seems to have taken a turn for the worse on US employment as the unemployment rate fell consistently since mid-2003 before ticking up mid-2007. Weekly jobless claims have been very high of late. Fresh USDJPY shorts may be the place to be again soon.

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