Video – 06/25: Previewing the Week Ahead – EU Summit, Macro Data and Risk Sentiment

Markets start the week with a risk-off tone as concerns around the Euro-zone mix with worries about global growth and weaker earnings. The focus this week will be the EU Summit which will be held on Thursday and Friday.

Overnight Developments:

  • Spain made a formal request for assistance from eurozone partners to help recapitalize its banking system.
  • No amount mentioned, but €100bn is the figure we are expecting.
  • Last week’s audit showed Spain may need €65bn.
  • Spain’s 10-year yield rises today (as does Italy’s).
  • Equities under pressure to start the week as global growth fears, worries about corporate earnings, and skepticism that Europeans will provide comprehensive solution at their summit weigh on risk sentiment.


Key Developments Last Week

  • Poor global macro data – China’s manufacturing PMI, Germany’s Manufacturing PMI, ZEW Economic Sentiment and IFO, US Philly Fed index point to weakness in the world’s industrial powers and softening demand and trade.
  • Market anticipation of FOMC providing robust stimulus dashed – though Fed extends Operation Twist and leaves the door open for a move in August if (labor) data deteriorates further.
  • Spain pays high interest rates at auctions, but 10-year yield falls back to 6.50% as expectation that EFSF/ESM may be used to buy bond on secondary market calms periphery.


Theme of the Market:

  • While weak global macro data has caused commodities and equities to weaken, there are 2 main supports still for sentiment.
  • Central banks may co-ordinate intervention – ECB to lower rates, BOE to restart QE, Fed to take more action (6 weeks before next meeting).
  • That eurozone government have the ability “to introduce measures to share risks more effectively”.
  • While we have seen some improvement in Spanish yields last week, that was completely fueled by anticipation that EFSF/ESM will be used to buy bonds in secondary market.
  • Therefore, sentiment rests on the shoulders of Angela Merkel and whether Germany goes along with the demands/requests of Italy, Spain, France.


European Summit:

  • A failure this week to craft a blueprint for a tighter fiscal and banking union would trigger further speculative attacks on Europe’s troubled economies.
  • An EU blueprint for the future of the euro is to call for member states to surrender powers to run their banks, give up some control over national budgets and explore pooling the risk of underwriting deposits and raising debt.
  • The 10 page draft is written by EU council president Herman Van Rompuy, EC president José Manuel Barroso, ECB president Mario Draghi, and Jean-Claude Juncker, chair of the eurogroup of eurozone finance ministers.
  • One key factor in discussions has been a German demand that tough central controls on national spending and taxation are included as a condition to discussing options to pool debt, such as eurobonds, eurobills, or a eurozone redemption fund.
  • The draft makes clear that this “qualitative move to fiscal union” is likely to require EU treaty changes.
  • More rapid progress is envisaged in the first section of draft, setting out an “integrated financial framework”, or financial union open to all 27 member states.
  • It includes a common EU rulebook for banks, the creation of a single supervisor and common deposit insurance and bank resolution fund. Britain and others outside the euro area could opt out of sharing risk or sovereignty.


Macro Data:

  • US – new home sales (today), CB consumer confidence (Tue), durable goods (Wed), final GDP (Thu), Chicago PMI and personal income and spending (Fri).
  • UK – public sector net borrowing, Inflation Report Hearings (Tue), mortgage approvals & CBI realized sales (Wed), BOE credit conditions survey, current account, housing prices (Thu), BOE financial stability report & Mervyn King speaking (Fri).
  • EUR – German employment change (Thu), German retail sales (Fri), money supply & private loans (Fri)
  • Japan – retail sales (Wed), household spending, inflation, unemployment rate, industrial production (Thu).
  • AUS – new home sales (Wed), private sector credit (Thu).
  • NZ – trade balance (Tue), business confidence (Wed).
  • CAN – GDP & producer prices (Fri).


Factors for Key Currencies:

1. EUR


  • Will policymakers give enough to boost market sentiment?
  • Traders have become wary of such summits as the trend has been for markets to rally into such a gathering as hopes for a tangible solution are raised, only for a lack of substantive progress to deliver disappointment.



  • Data from Germany shows economy catching the flu from rest of Europe.
  • Spain paying unsustainable levels to auction off debt.
  • Next steps in Greece still uncertain.
  • Market pricing in an ECB rate cut?


2. USD


  • FOMC held back from another round of QE-type stimulus.
  • Global growth fears & weaker commodities and equities create flight to safety demand for USD.



  • Economic data continues to undershoot expectations – latest example being the plunge in Philly Fed manufacturing index.
  • The weaker the data, the more chance that Fed will act.


3. GBP


  • With commodity currencies falling as a result of weaker commodity/equity prices, and Europe caught in debt crisis, GBP may be best of the “higher yielders” and therefore resilient.



  • Softening inflation has increased calls for more QE from BOE.
  • If economic data remains poor.


4. AUD


  • Australian data has improved of late (1Q GDP, employment data, trade data) giving it a strong run against CAD.
  • Lower interest rates should help consumer confidence/spending, and housing market.



  • Chinese (and global) manufacturing data undermines growth concerns hurting high beta currencies like AUD.
  • RBA cuts rates, narrowing rate differential advantage.


5. NZD


  • No outright mention of rate cut by RBNZ in its policy meeting.
  • Stronger than expected GDP data last week.



  • If market sentiment continues to be weak, sensitive risk currencies will continue to be pressured.


6. CAD


  • BOC kept its slightly hawkish tone in previous statement.
  • Will policymakers (G-20) or central bank intervention (FOMC) help risk-sensitive currencies?



  • Softening in US data.
  • Worries about global trade.
  • Falling oil prices.


7. JPY


  • Worry over global growth, Euro-zone crisis can boost safe haven demand for JPY.



  • Further jaw-boning about JPY strength by officials.

Video – 06/22: The Week in Review – Macro Data Softens, Spanish Yields Fall, FOMC Extends Twist

Overnight Developments:

  • Moody’s downgrades 15 top banks including Morgan Stanley, BofA, Citigroup, RBS, Credit Suisse, UBS, BNP Paribas, Deutsche Bank.
    Likely to increase borrowing costs of these banks, and counterparties may demand more collateral.
    German IFO Business Climate index fell to 105.3 from 106.9 in May – a 2-year low.
    Spain’s audit shows bank recapitalization needs at 62 bn euros.
    US equities plunged yesterday, in the 2nd worst sell-off of the year, with Goldman Sachs putting out a recommendation to short S&P.

Key Developments This Week:

  • Greece elections conclusive but any relief to markets short-lived.
    Poor macro data – China’s manufacturing PMI, Germany’s Manufacturing PMI, ZEW Economic Sentiment and IFO, US Philly Fed index point to weakness in the world’s industrial powers.
    Market anticipation of FOMC providing extra stimulus dashed – leave the door open for a move in August if data deteriorates further.
    Spain pays high interest rates at auctions, but 10-year yield falls back to 6.50% as expectation that EFSF/ESM may be used to buy bond on secondary market calms periphery.

European Pre-Summit Talks:

  • Do Europeans give Greece more time to achieve its deficit-cuts? So far, Germany and other creditor nations reluctant.
    How to do a recapitalization of Spanish banking system without scaring investors away from Spanish bonds (issues of seniority and subordination)?
    A failure next week to craft a blueprint for a tighter fiscal and banking union would trigger “progressively greater speculative attacks” on Europe’s “weaker” economies. – Mario Monti

Theme of the Market:

  • Macro data shows global demand faltering, trade to pull back – commodities weaker, equities which were buoyed by hope of central bank action (FOMC) gave way yesterday.
    While we have seen some improvement in Spanish yields, might just be a respite ahead of the EU Summit, and is completely fueled by anticipation that ESM will be buying bonds on secondary market.
    Much rests on the shoulders of Angela Merkel and whether Germany goes along with the demands/requests of Italy, Spain, France.
    Fed extended Operation Twist, and expectations that ECB will lower rates and that BOE will restart bond may give some underlying support to equities.

Video: Key Risk Events for Thursday – BOE, Aussie Employment, Chinese Trade, Bernanke

Video – Previewing Thursday’s Risk Events


As we move through a volatile week in markets, we have 4 key fundamental events/releases to give us more impetus and catalysts. Currently the market’s sentiment is very risk averse and we will see if there is any change to that general sentiment – driven by fear of Greece following its indecisive election on Sunday. Let’s see if the market can


Here are the 4 key risk-events:

1. BOE Interest Rate Decision – Does the BOE undertake further QE or does it pick this moment to pause its bond purchase program? Housing and retail sales data this week has been poor from the UK. Is it enough to sway the BOE to put up another 25 billion for QE? The decision will be key for the GBP.

2. Australian Employment Change – The Aussie has been sold mercilessly of late as global growth concerns have picked up following the poor US jobs data last Friday and as there are concerns the recession in the Euro-zone is deepening. The macro data has been poor from Australia as well – including another trade deficit. If the labor market struggles then the AUD will fall further. However, a surprise report here might be able to bring some relief to the beleagured currency.

3. Chinese Trade Balance – Chinese trade data will also be important for the AUD. Did Chinese manufacturers and other industries buy up the iron ore and coal that Australia is selling? More imports by China would help the case that there is some demand for goods from Germany and the US and will help dent fears. More importantly for global growth, how did Chinese exports do? Did we see a pullback in global trade with less demand for Chinese goods? This should be a closely watched report in Asia.

4. Bernanke Speech – Bernanke is set to give a talk on banks at 9:30AM on Thursday. It’s unclear if he will have a Q&A session, but if yes, then any hints of possible QE3 might help risk sentiment to stabilize, if not reverse some of the recent losses. Bernanke may want to prep markets ahead of next week’s FOMC decision if there is going to be any shift in the Fed towards more stimulus.

Trading Plan Video – This Week in EUR/USD: Assessing Short Opportunities

– In this video I go over my view for the EUR/USD pair, quite bearish, as price in the daily chart continues to  be well below the 200-ema, and we started the week piercing key support levels at 1.30 and 1.2975.

– I have been bearish on this pair from the macro side throughout all of April, but it was held up by sideways equities and general slow labored rally. A key break below 1.30 handle opens up downside targets and it means that we have big uncertainty regarding Europe following France and Greek elections, and as austerity measures deepen the Euro-zone recession (outside Germany.)

– There are 2 scenario I am monitoring.

1) One is the breakout in which political uncertainty or negative headlines drag EUR further down. If this happens want to get on the short side before the break (end of current pullback).

2) If we have some stabilization in risk assets and have another slow and labored rally, there will be several opportunities to short the pair on the way up and here proper position and risk management will be key.

A. The first opportunity would be when the pair closes the gap (1.3080) made from the weekend. That could be where the counter-trend short term move ends.

B. If not, and we have further retracement then we look at the 50% (1.3120) and 61.8% (1.3155) fib levels and the old level of resistance near 1.3180.

– The price level at which I know I’m wrong and the bearish scenario is not panning out will be above 1.3190.

USD – Preview: Will April NFP Give Market Clues to Fed’s Next Move?

USD – Preview: Will April NFP Give Market Clues to Fed’s Next Move?
USD – Preview: Will April NFP Give Market Clues to Fed’s Next Move?
Release: US Non-Farm Payrolls (Apr)

Consensus Forecast: 173K

Release: US Unemployment Rate
Consensus Forecast: 8.2%

Date/Time: 05/04/12 8:30AM EDT (12:30 GMT)


Will April NFP Give Market Some Answers on Direction of the Fed’s Next Move?

April’s non-farm payroll report will be important as it should set the tone for the general financial markets and the USD over the next few weeks. That is because it will give us clues as to what’s next for Fed policy, as the speculation continues to waver between the Fed undertaking more stimulus or holding steady, and that speculation has been much more data driven over the last few weeks.

March’s nonfarm payroll report was a disappointment with only 120K jobs created. The consensus forecast for April is that the economy added between 170K and 180K, certainly an improvement.


What Do The Leading Labor Market Indicators Tell Us:

Key data from the US has been mixed this week with the ISM manufacturing index showing improvement while the services index showed a slowdown in activity – though still an expanding sector.

We want to focus on the employment sub-gauge within each, and see that the Services employment index fell 2.5 points to 54.2, while the employment sub-gauge within the manufacturing index rose 1.2 points to 57.3. As the services sector makes up a larger portion of the overall economy that argues for the NFP report to come in softer than expected compared to the beginning of the week when the consensus figure was first released.

Next, looking at jobless claims data the month of April showed claims at a significantly higher level than in March which should also argue for caution in regards to April’s NFP data. We did see an improvement in the most recent claims report for the week ended April 28th, but it’s not enough to push down the 4-week moving average which has climbed higher during the past month.

Finally, in our third data point the ADP employment change showed just 119K jobs created in the private sector during April, much lower than the consensus forecast of 180K. While the ADP can be hit or miss sometimes in regards to its correlation with the private sector portion of the NFP, and undershot the NFP report strongly in January, the trend of both is certainly similar, and that too argues for a NFP reading that may be softer than the consensus.

Conclusions and Implications:

Looking at the 3 leading indicators – the employment sub-gauges within the ISM reports, jobless claims, and the ADP employment change – we tend to hold a bias that the NFP data should disappoint the consensus forecast and come in weaker, between 150K-160K.

A figure that is lower than that, something similar to March should really disappoint the Fed and would argue that the US economic momentum seen in the beginning of the year is waning (the data is already showing that, but that it has materially transferred to the labor market).

That should increase speculation that the Fed will undertake further stimulus in the middle of the year especially as “Operation Twist” is coming to an end at the end of next month.

A report in which job growth is weaker than expected should weigh on equities and risk sentiment though at the the same time any hope of the prospect of more stimulus from the Fed can serve to do the opposite. In currency markets the USD is likely to be weaker on any increase in speculation over QE.

However if the NFP hits the consensus forecast – especially considering that a weaker report may be getting priced into the market – would certainly beat back speculation of more QE and therefore help strengthen the USD while at the same time helping equities. As a result, we could have one of those rare days where both the dollar and equities rise in tandem.

EUR – Preview: If ECB Provides No Silver Bullets, EUR Likely to Extend Decline

EUR – Preview: If ECB Provides No Silver Bullets, EUR Likely to Extend Decline
EUR – Preview: If ECB Provides No Silver Bullets, EUR Likely to Extend Decline
Release: ECB Interest Rate Decision

Consensus Forecast: 1.0%
Date/Time: 05/03/12 7:45AM EDT (11:45 GMT)

Release: ECB President Draghi Press Conference
Date/Time: 05/03/12 8:30AM EDT (12:30 GMT)

Can ECB Offer Any Help to Euro-Zone Economy Seeing a Deepening Recession?

The European Central Bank decision comes amid increasing signs that the recession seen in the economic bloc is deepening. Data from Italy showed unemployment rate at its highest in the euro era, Germany unexpectedly added more unemployed, and the overall euro area saw its unemployment rate rise to 10.9%.

The final version of the manufacturing PMI showed weakness across the board and has increased concerns that austerity measures across the continent are exasperating weakness and as a result there are increasing calls for some growth measures to be taken by governments to counteract austerity measures (and the deleveraging cycle).

Therefore there will certainly be many looking for and calling for the ECB to provide some kind of help by either signaling that they are ready to lower interest rates or by providing some type of non-standard measure such as an increase in liquidity via more loans similar to LTRO 1 & 2.

However, such help might not be forthcoming as the ECB is concerned about the impacts of inflation which has come in stronger-than-expected over the previous two months. The preliminary reading for April saw euro wide inflation added 2.6% annual rate, higher than forecasts, though lower than the upwardly revised 2.7% seen in March (it had been at 2.6% previously).

In its previous meeting the ECB said it was worried about inflation especially as the economy digested higher oil prices. While ECB President Draghi said last week that economic weakness should act as a counterweight to higher price pressures from commodities and therefore lower inflation going forward in 2012, he may not be in a position to offer monetary stimulus at the current moment considering there is a divide on the ECB Governing Council.

He has also called for growth measures to be implemented alongside the “fiscal compact” but structural changes to labor market reforms for instance will take time to reap any benefits and therefore will not be of immediate help to the economy.

Therefore the Euro is caught between a rock and a hard place. If the ECB does not offer any stimulus, or the prospect of lower interest rates, then the recession – which is getting worse – will continue to play out and pressure the EUR lower. That could mean that the EUR/USD heads back down towards 1.30 or below.

On the other hand if the ECB offers up lower interest rates, while that is a positive for the medium-term outlook for the economy it weakens the euro from a interest-rate differential perspective. One is the short-term impact and the other is a medium-term impact, and the market eventually would realize that lower rates is a negative for the euro even if talk of stimulus helps ramp-up sentiment in the short term.

The likeliest answer that the ECB will provide is that it’s up to governments to create some growth measures as well as to enact the structural reforms needed to make that euro zone economy more competitive. One way the ECB can help is to talk down the euro, which can stimulate European exports which is one avenue of growth for the European countries, however that scenario too holds the prospect of further EUR weakness.

I am therefore generally bearish coming into the ECB decision, and have been bearish on the EUR from a macro level throughout April, though the EUR/USD pair has not really conformed to the constant drip of negative headlines until Wednesday’s trading session (likely as there was some repatriation of EUR as well as some pricing in of possible monetary stimulus from the Fed). If there are no magic bullets from the ECB, then maybe the EUR finally starts to buckle under the weight of the negative data and falls down to its lows from the past few months around 1.30 (and eventually lower to 1.2650 area).

CAD – Preview: CPI Data Important For Loonie Bias Post BOC

CAD – Preview: CPI Data Important For Loonie Bias Post BOC
CAD – Preview: CPI Data Important For Loonie Bias Post BOC
Release: Canada CPI m/m (Mar)

Consensus Forecast: 0.5%

Release: Core CPI m/m (Mar)
Consensus Forecast: 0.3%

Date/Time: 04/20/12 8:30AM EDT (12:30 GMT)

After Hawkish BOC Inflation Data Important for CAD Fundamental Bias?

The Canadian dollar got a huge boost from the Bank of Canada interest-rate statement which was more hawkish than expected, with the central bank expecting growth to be better than previously anticipated and with slacker excess capacity in the economy for inflation to be firmer than expected.

We can see this in the annual pace of CPI which has risen over the last two months after declining in the latter part of 2011.

On the month inflation is expected be rather strong with a 0.5% headline reading following the 0.4% in February, but the core rate is expected to come in at a cooler 0.3% rate after climbing 0.4% in February. Those types of monthly readings are certainly enough to keep the Bank of Canada concerned about price pressures.

However, when we consider annual prices, tomorrow’s data may actually put the BOC a bit at ease. The forecast for annual inflation is for prices to cool to 2.1% from February 2 .6%, with the core CPI expected to fall to 1.9% following the 2.3% reading in February. While the headline inflation rate will continue to be above the 2% target of the central bank, it should be encouraged that the core rate will fall below it.

Therefore, if the actual figures hit expectations we could actually further ease some of the recent strength in the Canadian dollar as it will contradict some of the hawkish language in the BOC statement.

However, and this is the most interesting case, if inflation prices wind up coming in stronger-than-expected, well then the central bank will continue to strike a hawkish tone going forward and we can take on a more bullish bias for the CAD.

The USD/CAD continues to be trapped within its almost 3-month long range, unable to build on its move in favor the CAD earlier in the week as a result of the BOC statement.

The pair currently moves back to test its 200-ema in the 4H timeframe near 0.9960. Therefore, as we find ourselves in the middle of our current trading range the inflation data can give us a rather clear trade idea.

A better-than-expected report could see the pair retest its lows from earlier in the week (0.9880) while a disappointing release – one that shows annual inflation muted – could see the pair trying to retest the parity level if not 1.0030.

NZD/USD – Preview: Surprise in 1Q CPI Data Can Jolt Kiwi

NZD/USD – Preview: Surprise in 1Q CPI Data Can Jolt Kiwi
NZD/USD – Preview: Surprise in 1Q CPI Data Can Jolt Kiwi
Release: NZ CPI q/q (1Q)

Consensus Forecast: 0.6%

Date/Time: 04/18/12 6:45PM EDT (22:45 GMT)

Will Inflation Data Act As a Catalyst for NZD?

The upcoming first quarter CPI inflation data is not expected to be a blow-out affair.

After declining 0.3% in the fourth quarter inflation is expected to rebound the modest 0.6%, a faster pace than in the 3Q, but below the pace seen the previous 4 quarters.

A rise of 0.6% on the quarter should actually see prices in annual terms fall to 1.6% from the 1.8% reading seen in the 4Q. That is well within the RBNZ inflation target between 1% and 3%, and is actually at the lower end of that target. It’s also far below the heightened inflation readings seen most of last year. Therefore, at the current moment inflation is not a big concern for the central bank and expectations around interest-rate increase from the RBNZ this year are muted (overnight index swaps are pricing in 14 basis points of increases over the next 12 months).

NZD/USD – Positive or Negative Surprise Could Give Kiwi Some Direction

In order to make it interesting, and to create some trading opportunity for NZD pairs I am looking to see if the there is a positive or negative surprise in CPI which could help be a catalyst for some moves for the Kiwi.

A reading that pushes prices above 2% annually for instance would be a positive surprise to the market and would warrant a reaction. If on the other hand we see prices coming in weaker than expected – a quarterly change below 0.5%, and an annual rate below 1.5% – that would likely undermine the fundamental case for the NZD.

The NZD/USD pair  has been trading sideways for the last 6 and 1/2 weeks, thought it managed to push to a a 6-week high near 0.8315 last week where it was rejected at the 61.8% retracement of the downswing seen in late February-early March. To the downside, the pair has been capped at 0.8055 over that span, and has not fallen below 0.8120 during the last three weeks. Again, very ranging conditions.

A negative surprise, one in which inflation is even more muted than the status quo expectation could give the pair a reason to head down towards its lows from the previous 3 weeks near 0.8120 at which point we’ll see if there is enough momentum to break that level and target 0.8055.

Earlier in the week, food prices showed a 1.0% decline for the 1Q, which points to a negative surprise as the more probable outcome.

A positive surprise on the other hand, one showing inflation pressure picking up, could see the pair begin an ascent towards the 0.8230 area, our highs from earlier this week.

Now, the NZD/USD is beholden to general risk sentiment, and sentiment was generally weak today, but an important fundamental release like the quarterly CPI data could just be the catalyst needed to spark a move one way or another. Still, with the sideways action of late, we shouldn’t expect a an out-sized move one way or the other.