Tuesday, July 20, 2010

Another 15 Unusual Ways to Solve Problems

Forex News and Events:

With Tokyo taking an extended holiday weekend - it’s hard to identify if there has been a shift in sentiment or if today’s actions are just the result of low liquidity. The media has taken a pessimistic tone following last week’s US data and this week’s upcoming EU bank stress test results. One event worth noting this week will be the BoC’s rate announcement on Tuesday. Markets are broadly expecting a 25bp hike by the central bank. There is however some risk that Canadian officials may opt to wait until the results of the EU bank stress test are released before engaging in further tightening. Mid-term, we’re bullish on the CAD due to the combo of rate differentials, growth prospects and rising commodity prices.

Otherwise, Moody’s kicked off the trading week by downgrading Ireland to Aa2 from Aa1 - one notch lower. The rating agency gave three core reasons for the downgrade: 1. Erosion of government financial strength 2. Weak growth prospects 3. Risk that contingent liabilities in the banking system would appear.

As expected the EURUSD sold off - however the single currency was able to rally right back to 1.2982 - a bit short of Friday’s 1.3017 high. The first half of this week contains few economic releases of importance, so participants will likely be discussing Friday’s data releases. We have been hearing lots of noise from EU members regarding the quality of the upcoming test. While we are not completely discounting these comments, we are taking them with a pitch of salt.

As we consider these points, let’s not forget that earning season is in full swing and that results so far are heavily skewed to the positive side – with 26 of 31 major companies already posting positive results. Interestingly, the solid earnings were overshadowed by poor US data which then pushed equity markets lower and US treasury yields to record lows. This begs the question - what if future corporate earnings disappoint and US data doesn’t improve?

The USDJPY is fast approaching levels not seen since Nov of last year. Since higher US yields are not likely in this environment, the only really way JPY will shift directions is a BoJ intervention. While we are not there just yet, 85 pitches exporters which politicians and BoJ members alike will obviously hear. We are buyers of USDJPY on dips.

On a side note, talks between Hungary and IMF/EU fell apart this morning as Hungarian official refused further austerity cuts. Hungary has already received roughly $25bn in emergency bailout funds and we doubt that without the IMF financing, their ability to secure capital from the marketplace will be greatly hampered. As expected, we’ve already seen heavy selling of the HUF and without further information, it should continue throughout the day.

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