London Session: EURUSD starts to break down
Stabilisation in the Eurozone starts to wane
In this environment it’s worth looking at some of the pillars or rocks in the financial world to get a grip on sentiment. For me that is the bond market. Currently Spanish 10-year yields are at 6.86% (7% is considered the Rubicon line, above which a country may eventually need a bailout). Spreads between Spanish 10-year and 2-year debt are back at more healthy levels as two-year yields have backed away from the 7% level they reached last week. German bond yields have bounced off their record lows below 1.2% for the 10-year, but they still remain 100 basis points lower than this time last year.
So what does this tell us? Firstly, it says that the Spanish debt crisis may have stabilised slightly – as exemplified by the stabilisation in the 10-year – 2-year spread, but the elevated levels of 10-year yields show that bond investors remain on their guard. Indeed, although there has been some selling pressure on German Bunds, this has not turned into a torrent and German debt remains an attractive safe haven. So the Eurozone crisis may be on the back burner for now, bank stocks and short term debt levels may have stabilised, but while Spain is still to-ing and fro-ing about applying for a bailout and Germany has not yet ratified the long-term bailout fund, the ESM, then the sovereign crisis could flare up once more taking complacent markets by surprise.
The euro has backed off the 1.2450 highs vs. the dollar that it reached earlier this week as the realisation that the sovereign crisis hasn’t been solved appears to have hit the market. 1.2280 then 1.2160 are major support zones to be aware of in the coming days. 1.2405 is key resistance in the short term – the 50-day sma. We believe that in the absence of much political or central banker speak for the rest of this week and into next, we could be range bound for some time in this pair. At this level the 1.20 June 2010 lows are still in view.
US jobs data ok
The markets are scrutinizing every piece of jobs data from the US at the moment since the labour market is a deal breaker for the Federal Reserve. If it continues to recover then there is a reduced chance of more QE from the Fed. Today we got a fairly good initial jobless reading for last week, with the number of newly jobless Americans dropping from367k to 361k. This follows on from the bounce back in payrolls last month. While the US labour market is not running on full speed, it is not bad enough to support more stimulus from the Fed. This is helping to support the dollar, as expectations of a dovish Jackson Hole speech from Ben Bernanke start to fall away.
There was better than expected employment news from Australia for July with the economy creating 14k jobs (the expectation was for 10k). The unemployment rate also declined to 5.2% from 5.3% in June. This helped the AUDUSD to make another attempt at 1.06; it was also boosted by expectations of further Chinese stimulus after inflation fell to 1.8% last month from 2.2% in June. However, AUDUSD was yet again rebuffed at this major resistance zone as the dollar bullishness took hold. Looking ahead, the direction of this pair is likely to be determined by overall market sentiment and could trade in a 1.0450 – 1.0625 range in the near term.
China – PBOC waits for Europe
This brings me onto my last thought of the day, China. Yes the economy is slowing down, yes, inflation is falling sharply, but the Chinese authorities may not be as willing to do more stimulus as some may think. The reason for this is that China’s growth problem is not of its own making – it’s caused by events in Europe hurting exports and also weakening confidence at home. Thus, the Chinese authorities may wait for Europe to act before giving their own economy a boost. Hence, the Aussie dollar may not get such a boost from potential Chinese support as some may think.
Also, while opportunities in FX may seem a bit thin on the ground, commodities could be where the fun is over the next 24 hours. The US Department of Agriculture releases August production data for grains including corn tomorrow. This is a bit like the NFP data release of the commodity world and is a BIG deal. A drought in the US could weaken production data and push up prices, especially for corn. Hence traders should keep an eye on the USDA report tomorrow at 1330 BST/ 0830 ET.
Data Watch: Japanese GDP for Q2 is the highlight data release overnight
One to watch: EURUSD
It looks like this pair is breaking down after a fairly good run at the start of the week post the better payrolls. However, the rally was on shaky foundations – Spain is no safer today than it was last week. The European authorities can talk the talk but they haven’t actually done anything to solve this crisis. This leaves EURUSD vulnerable in our view. Below 1.2280 we may see back to 1.2140 in the coming days. Due to a fairly clear economic calendar and few politicians or central bankers scheduled to speak next week we could be range trading for a while in this major cross.