Optimists squeezed ahead of EU Summit

Publication date: 25 June 2012
Author: John J Hardy, Saxo Bank

Optimists squeezed again ahead of EU summit

Today saw follow through on last Thursday’s meltdown in risk, this time with the JPY cutting a vicious swath across the major currencies. The tables have been turned in major JPY crosses.

Today seemed to be about proving that a directional move can follow through after all. Last Thursday, recall, we had the huge USD reversal a day after the US FOMC meeting seemed to produce a shrug of the shoulders. Friday saw a the USD unable to follow through, and the odd squeeze higher in USDJPY, and then today we get the USD moving higher with the JPY suddenly reverting to character and pushing higher as well, with a chunky reversal in USDJPY and even more so in EURJPY, AUDJPY, etc… See the EURJPY chart below and comments below.

Forbes ran a commentary piece over the weekend called “Spain: Liar, Liar, Pants on Fire” –on the underestimated losses in the Spanish banking system. The best quote from the piece: “The only metric where [Spanish banks’] record remains unblemished is their stellar consistency in underestimating their losses.” Spanish yields backed up higher on the day and EURGBP, still an excellent barometer of Euro sentiment, is heavy back toward the key 0.8000 level.

EURJPY drooped suddenly on the day as sovereign bonds/bunds found support at critical levels (The German bund topped out recently at around 1.63%, just where it bottomed in the previous cycle, though it is still considerably below its 200-day moving average at 1.81% – hasn’t traded above the 200-day MA since last July. US Treasuries are in a similar technical spot, though there has been more support in the US market due to the implicit support at the long end from Operation Twist.) The reversal reinvigorates the bearish argument, particularly as the last attempt higher has now been so severely reversed. The Tenkan-sen line (red) is the line of resistance going forward, with focus on the lows of the cycle should bonds continue to find support from here.

The Chicago National Activity index was weak again, as the onus remains on the optimists to make their case on the US economy. For the US, the rest of this week’s economic calendar includes the Consumer Confidence survey tomorrow (still relatively high, though last month saw a surprise dip in the Michigan survey), Durable Goods Orders on Wednesday, and then the Chicago PMI on Friday before next week’s usual mother lode of surveys and employment data.

For Europe, the focus remains on the EU summit later this week and gaming whether and to what degree Germany gives in on opening up its balance sheet – EuroBonds and fiscal union are off the table, with some form of assistance in turn for fiscal guarantees the more likely model to proceed from here.

In China, the Shanghai composite has lurched into a vicious sell-off since Friday, and considering the action there and the sell-off in metals, one wonders how AUDUSD remains anywhere close to parity. See Reuters article on China possibly missing its growth target as it heads for key leadership transition.