Tuesday, April 10, 2007

Heating up

The week has heated up a bit, with plenty of data points to digest. In no particular order, the following items are catching Macro Man’s eye this morning:

* If the word on the street is to be believed, Voldemort and co. have been active in selling USD/Europe overnight. In 2006, they started ramping it on Easter Monday. This year, they’ve evidently decided to wait until liquidity improves on Tuesday. Regardless, they’ve driven a small wedge between EUR/USD and relative rate expectations: the chart below illustrates EUR/USD and the expected 3 month cash spread this December. If maintained, the breakdown could be telling.
* The AUD is on fire: it’s broken parity against the CHF and is now at its highest level against the dollar since 1990. The next obvious technical barrier is 100 in AUD/JPY. M&A flow appears to be a primary driver here, and the technical picture is suggesting a risk of broad-based Aussie strength.

* On the other hand, the G7/IMF/World Bank meetings this coming weekend have prompted little more than a yawn. This is somewhat surprising, given it was these very meetings last year the caused the market to go long yen and short all things with current account deficits. The market’s complacency, combined with relative price extremes, is worrisome. Of course, they may be taking their cues from policmakers; the MAS has intervened vigorously today to weaken the SGD against its NEER basket.

* Like a dog with a chew-toy, Europe refuses to let go of the US mortgage loan story. The employment data has been written off as weather-related (where was the dismissal of the February data for the same reason?), while the recent American Home Mortgage announcement has provided further encouragement to the “hell in a handbasket” crowd. Nevertheless, European equities have opened strongly today, suggesting a reasonable degree of comfort that any economic fallout will be ring-fenced.

* China’s trade data for March revealed a remarkable contraction in the surplus, from $23.8 billion in February to just $6.9 billion in March. Yearly export growth plummeted from 51.7% to 6.9%. Now, either the global economy has hit a brick wall, or there is some funny business going on with the data. Macro Man votes funny business, with the likely culprit being firms’ desire to shift merchandise ahead of government-imposed export quotas. On a smoothed basis, the data suggests some moderation of the surplus but continued strength in exports.

* Inflation in Norway hit its highest level since spring 2003. This should validate further aggressive tightening from the Norgesbank and spur the NOK a bit higher on a broad basis. There may well be a trade here. This latest in a broad series of upside inflation surprises do little to alter Macro Man’s belief that inflation, rather than recession, is the biggest threat facing risky assets at the moment. It will be interesting to see whether or not Jean-Claude Trichet begins positioning the market for a further tightening of ECB rates; if he does, both the euro and Macro Man’s short euribor position should benefit.


Sandy said...

Asian intervention was actually very very heavy today in Asia, with RBI, MAS, BoK, BSP joining hands with the usual suspects PBoC and BNM. Implications could be [a] recycling of these dollars into other currencies like Euro. This is true in particular for MAS (estimated intervention $2.5bn) which manages the SGD against a basket of currencies; and [b] other relatively passive CBs might be tempted to park them in the US Treasuries.

Pretty interesting since both US yields and EUR/USD are at pretty crucial resistances. A break here, and we just might see the next leg of USD weakness.

Stay short the Greenback !!

Anonymous said...

[Nevertheless, European equities have opened strongly today, suggesting a reasonable degree of comfort that any economic fallout will be ring-fenced.]

Better let all the foreign CBs know that they will be liable for defaulting mortgages if Congress gets it way...


Anonymous said...

Sandy -- great comment -- mind if I use it on my blog (with a hat tip to macroman as well)? And do you have an estimate of the combined intervention from all the asian central banks (excluding the PBoC)? i.e how does the BoK's intervention compare with the MAS's intervention?

p.s. I was under the impression that BNM had pulled back a bit on the intervention front, and was a bit more willing to allow the ringit to appreciate.

brad setser