GBP Falls Out Of Bed Overnight To A New Record Low Against The EUR
Forex Market Update: GBP Falls Out Of Bed Overnight To A New Record Low Against The EUR. RBA On Tap Tonight As Market Mulls Size Of Rate Cut
US Labor Day Holiday today. Hurricane Gustav fortunately so far not measuring up to Katrina’s wrath and likely to have limited market effect
MAJOR HEADLINES - PREVIOUS SESSION Australia Aug. AiG Performance of Manufacturing Index out at 47.0 vs. 46.9 in Jul. China Aug. PMI Manufacturing out at 48.4 vs. 48.4 in Jul. China Aug. CLSA PMI Manufacturing out at 49.2 vs. 53.3 in Jul. Australia Q2 Current Account Balance out at -12774M vs. -11650M expected and -19842M in Q1THEMES TO WATCH - UPCOMING SESSION
Key event risks today (all times GMT):
US Markets Closed Today for Labor Day Holiday Sweden Aug. Swedbank PMI Survey (0630) Switzerland Aug. SVME PMI (0730) Germany Aug. Final PMI Manufacturing (0755) EuroZone Aug. Final PMI Manufacturing (0800) UK Jul. Net Consumer Credit and Mortgage Approvals (0830) UK Aug. PMI Manufacturing (0830) US Fed’s Kroszner to Speak (1330) US Fed’s Hoenig to Speak (1845) Japan BoJ’s Shirakawa to Speak (0100) Australia Jul. Building Approvals (0130) Australia RBA Cash Target Decision (0430)
Market Comments
The USD opened the week with a relatively strong bid tone today despite the US Labor Day holiday that semi-officially marks the end of summer. The action may be partially due to some measure of relief already materializing in financial markets as it appears that Hurricane Gustav will not devastate oil refining areas of the gulf to the degree that Katrina did in 2005. Katrina was a force 5 hurricane as it traversed a key swath of Gulf of Mexico production facilities, while Gustav has fortunately so far held at the lower edge of the category 3 level after traversing the western edge of Cuba. Most of all, let’s hope this storm weakens even further and manages to avoid any significant loss of life along the middle Gulf Coast of the US, which is still recovering from the devastation of Katrina and Rita. Oil prices could continue lower if the damage assessments in coming days in the wake of the storm prove light and this would - other factors not included - be supportive of the USD and the JPY.
The RBA is on tap tonight with a rate decision. A small minority expect the RBA to whack the 7.25% rate by 50 bps while most are looking for a measured 25 bp easing. In any case, this is clearly the beginning of an easing campaign that will stretch into next year and will continue to see interest rate spreads vs. the USD and JPY continue to shrink. Commodity prices will be a key secondary market to watch for confirming/resisting the weaker AUD trend. The rate cut is basically priced in and it will be the guidance from the RBA’s Stevens that will be key for determining whether the RBA is going to maintain a slow and steady approach or whether the central bank’s concern is mounting and we could be looking at bigger cuts to come. If looking for a way to play a weak AUD outside of the USD and with lower volatility than AUDJPY, EURAUD is an interesting trade if it is able to punch through the 1.74/75 barrier that has provided resistance for the last 5 years. That development could open up for 1.8500+ in coming months.
The GBP fell out of bed to start the week here and is trading record lows against the EUR. The catalyst was like thin market conditions and heavy orders clustered around the critical levels that fell overnight as much as it was about the UK Chancellor declaring that Britain was looking at “arguably the worst” situation in 60 years. The negative UK story is extremely compelling, but GBPUSD has now fallen more than 7.5% below its 55-day moving average, by far the largest deviation - negative or positive - from this average since the GBP blew up in 1992. We’re no fans of catching falling knives, but we wonder how long this development can continue in such a one-way fashion in the short term, even if we are longer term bears on the cross…
Taking stock of where we stand with the USD rally across the board, we have seen very little consolidation so far in the major pairs besides USDJPY (more on that one below), and again we wonder in the short term whether the USD strength can continue in such a persistent fashion. Casting a glance over at our forward interest rate spread models, we actually see a the spread generally increasing in the EUR’s favor over the last three weeks from a low below 160 bps (For 2-year yields) to the current level around 175 bps. Other factors being equal, this would seem to suggest that the USD move is getting a bit stretched in the short term. On a technical basis, we have almost nothing to latch onto, however, so we are not fans of stepping in front of this particular on-rushing bus. Let’s see how the USD trades as we approach the key central bank meetings later this week (ECB and BOE) and what is likely to be a very ugly US employment report on Friday.
One factor that may be keeping the USD more elevated than might otherwise be the case is a Chinese desire to begin to rein in CNY appreciation as its economy shows increasing signs of a post-Olympics hangover and as the regime there would like to see sentiment boosted after the demoralizing fall (dare we say crash?) in equity prices this year. The Shanghai composite Index is off over 50% this year and the government is apparently planning a series of fiscal stimulus measures and tax cuts to ward off any post-Olympics curse, according to an article in Bloomberg this morning. This could mean less reserve diversification and therefore less pressure on the USD.
Chart: USDJPY
USDJPY is close to rather important support in the 108.30/00 area, a level close to old highs and recent lows, the 55-day moving average in red, and the rising trendline not far lower. If equity markets come back under pressure as the global growth outlook continues to sour and these lines of support give way, this pair could see a chunky correction lower towards 105.00.
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