Updated Aug 27, 2010 4:00:00 PM
Making lemonade out of lemons The past week saw a continuation of the stream of disappointing data out of the US and elsewhere, but around mid-week markets decided it was no longer a reason to sell risk. New lows were made in USD/JPY and the JPY-crosses early in the week after eye-popping declines in US housing data and a drop in durable goods orders. In Europe, comments from ECB and BOE officials warned of the real risk of a return to recession in the months ahead. European debt spreads continued to widen, with peripheral Eurozone (Ireland (credit rating cut), Greece, and Portugal) debt being sold and core Eurozone (Germany and France) bonds being bought on continuing fears of a sovereign default amid the worsening outlook. US Treasury yields dropped to new lows, with 10-year note yields touching 2.42% at mid-week. But by the end of the week, it was all good. US weekly jobless claims declined, though they remain at highly elevated levels, and the revision to 2Q GDP was not as bad as feared, though it confirms the meager pace of the US recovery. In a much anticipated speech, Fed Chair Bernanke repeated earlier comments that the Fed stood ready to undertake further unconventional easing measures if the outlook deteriorates more significantly, but was short on specifics about what might actually trigger Fed action. Perhaps most significantly, he did not make a concrete commitment to another round of quantitative easing (buying US Treasury or other debt), which effectively pulled the rug out from under bond prices. Bond markets have been on a moon-shot in recent weeks and the lack of assurances from Bernanke that fresh buying from the Fed would soon materialize sent the longs dashing for the exits, sending 10-year yields up over 16 bps on
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Updated Aug 20, 2010 4:00:00 PM
USD recovery, risk sell-off likely to continue After consolidating for much of this past week, the USD surged again to finish the week at new recent highs. The gains came in the wake of a disappointing US weekly jobless claims report and a shocking drop in the July Philadelphia Fed Index of local manufacturers, which fell to -7.7 from +5.1 in contrast to forecasts of gain to +7.0. USD strength in the face of weaker US data again illustrates the role of the USD as a safe haven currency. As the US outlook continues to deteriorate it spells bad things for the global growth outlook, undermining confidence and raising risk aversion. On Friday, Bundesbank Pres. Weber added another reminder of the dimming global outlook and latent Eurozone financial sector stress (see more below), sending the EUR sharply lower, but ultimately the USD higher across the board. Every major asset class is screaming that risk is 'off' and markets are still struggling to play catch up following a sharp reversal just two weeks ago. Major government bonds made new highs/yields new lows as investors continue to seek safety in the most secure investments. Oil prices (WTI) shed nearly 3% as global demand was marked lower and inventories (at least in the US) reached record levels of refined products. Given what we think is still the initial phase of major markets re-pricing a slower growth outlook, and aided by thinner summer liquidity conditions, we expect recent USD strength to continue, with accompanying declines in commodities and most stock indexes. Our only source of hesitation is that US Treasury yields have dropped to near key 2.50% levels in 10 year notes, and we think that could signal a near-term top for prices/low in yields. While we will continue to watch US
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Updated Aug 13, 2010 5:00:00 PM
The USD bounces back on global weakness, positioning Just a week after making new lows for the current decline, the USD has rebounded sharply against all other major currencies, though less so against the JPY. For the last several weeks, we had been suggesting that an eventual turn for the worse in economic data outside of the US would see the USD come back into demand. But where we were looking for a gradual turnaround in the data and most likely later in September, the shift came sooner and over a matter of days. A downgraded Fed assessment on the US outlook and data disappointments from all major economies (China, Japan, Australia, Eurozone) caught the market exceptionally short of USD and long others, triggering a massive rebound in the greenback. Mid-August doldrums and lower liquidity likely contributed to the rapid, one-way move. As of the end of the week, market anecdotes suggest real-money asset managers are still not on board with the USD recovery and are consequently lowering orders/offers to sell EUR/USD, GBP/USD, AUD/USD and other risk currencies. That the move was primarily safe-haven in nature is evident in US data continuing to show signs of weakness (meaning the USD was not being bought on better economic news) and sharp declines in US rates as investors sought safety in US Treasuries. Gold also strengthened alongside the greenback, suggesting gold was resuming its role as a currency alternative. The reversal this past week was not solely a USD rebound, but also a EUR sell-off, as sovereign debt concerns resurfaced (more below). The Euro finished the week lower against all major currencies as a series of events raised concerns anew over the risks of a sovereign debt default. Early in the past week, the Irish government was forced to pump more
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Updated Aug 6, 2010 4:00:00 PM
Interest rate spreads may have stopped undermining the USD
The greenback lost further ground this past week as data continued to portray a stalling US recovery and speculation mounted that the Fed would announce additional easing on Tuesday. In addition to weak data, one of the main drivers of USD weakness since the beginning of June has been a widening in interest rate spreads against the USD relative to other major currencies, especially in EUR/USD. EUR rates increased as markets priced-in the withdrawal of ECB long-term lending facilities and convulsed through the European sovereign debt crisis. US short-term rates also moved modestly lower as incoming data painted a weak outlook. Those spreads have stopped widening (from about -2 bps at the end of May to a peak at -50 bps at the end of July; last at -44.5 bps) and there is reason to believe they may begin to narrow in the weeks ahead, potentially signaling a medium-term top for EURUSD. With the worst of the Euro-zone sovereign debt concerns likely past, there is room for EUR rates to drop back, narrowing its advantage over the USD. At the moment, we have no evidence of EUR rates moving lower (US rates have moved up), but we will be watching this relationship closely in the weeks ahead. For the moment, the inertia is still against the USD and until we see more concrete shifts in rates, the buck remains a sell on bounces. All eyes on the Fed next week Markets are rife with speculation that the US Fed will feel compelled to initiate another round of quantitative easing to force rates lower and support the economy. In the minutes from the latest FOMC meeting, members indicated the outlook would need to worsen 'appreciably' to prompt additional action
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Updated Jul 30, 2010 5:00:00 PM
The Dollar is on the ropes, again
The final week of July saw mixed price action among asset classes, as better than expected data from outside the US was mostly offset by weaker US data. US stocks finished slightly weaker while the MSCI world stock index gained some ground. The CRB commodity index continued to advance, but WTI crude and spot gold both suffered small losses. JPY-crosses, the primary FX risk barometer, finished out the week unchanged to slightly down. The one clear mover of the week was the USD, which lost ground against all other major currencies. The reasons for USD weakness were so manifold, the real question is not why did the buck weaken, but rather why did it only weaken relatively mildly? The main source of USD weakness is growing evidence of a US slowdown as we move into the 2H of 2010, in contrast with far more resilient data coming out of the rest of the G-10, the Eurozone and the UK in particular. Signs of slowing in the US have also reignited deflation fears, even prompting one usually hawkish Fed member, St. Louis Fed Pres. Bullard, to suggest that the Fed may need to resume buying US Treasuries. Both those factors have led to a drop in US Treasury yields to new/recent lows, adding further pressure on the buck. Then we have comments from Moody's senior sovereign credit analyst suggesting that the US's Aaa rating may come under scrutiny unless the US presents a credible plan to cut deficits and stabilize debt levels. While the Moody's comments could re-focus market attention on US deficits in the short-run, we would note that the comments referred to a period several years away, and also echo prior credit rating agency warnings on US deficits from
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