Monday, 30 June 2014

Will the Summer USD Sale Continue?

It would appear we have started a summer sale in the USD.  To date, the markdown has been modest but a number of reports are pending in the holiday shortened week, so this could change. 

The Tuesday 24th economic news was positive with new home sales better than expected, 504K versus 439K and the previous period 425K.  The Consumer Confidence went up to 85.2% from 82.2% in the previous period.  The following day the data turned ugly.  The GDP for 1Q was a negative 2.9%, far worse than the expected -1.8%, and the -01% in the last report.  The core Durable Goods report continued with the negative tone as the M/M forecast was -0.1%, worse than the expected +0.3 and down from last month's +0.4%.

This comes at a time when the latest COT report show specs have a net long position of 114,201 USD contracts in the CME futures and delta adjusted options.  Mind you, currently, this is a net aggregate position, and there are some USD shorts, the largest being 67,230 contracts versus the long in the BP. 

The big USD longs are against short positions in the euro and the yen.  Bears were short 96,108 contracts in the yen, and 93,410 contracts in the euro.  For the current week, the USD has weakened modestly against both currencies.  Considering these three large positions, it is prudent to take a look at the pending reports which will impact these pairs.

While not a fundamental factor, it should be noted Jean-Claude Juncker was voted to be the new European Commission President.  PM Cameron strongly opposed Juncker but Chancellor Merkel rounded up the votes.  Juncker is a strong believer in centralization of power in Brussels, and expansion of the EU.  He has been party to austerity, the depression economics that has crippled much of Europe.

In the recent EU elections there was a massive vote against the expanding power of the EU in both France, Italy and Britain.  The voters have been ignored by the tone deaf EU leadership.  This battle is not over.

Click to Enlarge EURUSD Daily Currency Chart

In the US, the report with the highest potential impact is the NFP Report.  Anticipated on Thursday July 3rd is a report of 215K new jobs up from 217, and an unemployment number of 6.3%.  In my opinion, too much attention is given to the headline number, because it is subject to many adjustments and further, analysis is needed to probe the composition of the gross number.  Still, the NFP does move markets.

There are other significant reports which may provide clues about the direction of the economy and perhaps the USD. 

On Monday, we get the pending home sales report.  It is expected to show a modest increase in home sales +1.2% from last period's +0.4%.  This is followed Tuesday with the ISM Manufacturing PMI 55.8 up from 53.2. 

On Wednesday, Yellen is giving a speech, and on Thursday we get the ISM PMI Non-Manufacturing Composite Index,  56.1 Unchanged, and the US Trade Balance -$45B down from -$47.2B.

It is important we pay careful attention to these numbers.  The Q1 GNP number was dismal but most analyst have dismissed the importance, contending the number is a fluke.  Should these numbers belie that assumption, there may be pressure on the USD longs, if there is not also negative news for the other side of the USD pairs. 

Click to Enlarge USDJPY Daily Currency Chart

Bearish news might possible take the USDJPY under the 100.50 support where there should be stops.  In the euro this data might take the EURUSD toward the 1.38 handle.  In a holiday shortened week,moves can be exaggerated.

There is the possibility of some market moving events coming from Europe.  Ironically, and at the same time the US will release the NFP Report, theECB President will be holding a press conference.  Preceding this by forty-five minutes is the EU interest rate statement.  Will Draghi come up some new monetary tricks?  There are rumors Draghi will commence some QE by purchasing private rather than public sector debt,  Makes sense.  Why not own Siemens debt?  Or debt from the German car companies rather than Spanish or Italian sovereign debt?  This might also buy German support for some type of QE.

We begin on Monday with the EU M-3 money supply, the broadest measurement of the money supply.  This is expected to be a positive 0.8%, the same as last month.  For a money supply needed to finance a healthy recovery we need at least 1.5% growth.  This number indicates a lack of private sector money lending, and a languishing  economy and will serve to motivate money creation by the central bank.  A small number should be bearish euro. 

On Tuesday we get the European Manufacturing PMI estimates.  Aside from France which is under 48, the estimates for Germany Italy and Spain are all expected to be in the 52/53 range. The most significant number will be the German expectations.   Will the expected 52.4 hold up?

Employment numbers will also be released for EU countries.  The estimates do not foresee improvement.  Unemployment for the EU is estimated to remain at 11.7%, and is higher in the Club Med countries, 12.7% in Italy, compared to only 6.7% in Germany.  Again, the German number is important since it gives us a glimpse of potential economic stagnation.  Is it spreading to the core of the EU?

Click to Enlarge GBPUSD Daily Currency Chart

The only major report in Japan this week is the Tankan Manufacturing Index which is expected to drop to 15 from 17.  The Non Manufacturing Index is forecast to drop from 24 to 19.  resulting from the increase in the consumption tax in April.   The impact of the consumption tax is still being analyzed, and many mundane fundamental economic reports now take on additional importance.  A Friday report showed the average Japanese household decreased their spending by 8% in May, more than expected.

Analyst expect the 2Q Japanese economy to slow.  The BOJ is forecasting  increased 3Q activity, but many are dubious.  Many analyst have concluded PM Abe's uber Keynesian policies are ultimately doomed to failure.  Yen shorts have been positioned accordingly for months with little to show for it this year.  

As discussed before, part of Abe's plan is to encourage savings monies to be reallocated money from the pension funds to "riskier" assets.  This involves selling the JGBs, buying Japanese and foreign stocks and bonds.  Trade in the Nikkei 225 has recently remained range bound but Volatility did pick up late in the week.  Quietly reallocating as much s $500B will be difficult.

For months the pound has been propelled by many favorable economic reports. 

On Friday, the GDP was discloses to be +0.8% as had been expected.  For the year they are projecting 3.% growth.  This week there is a series of M/M PMI reports.  Manufacturing is expected to decline from 57 to 56.8, Construction down from 60 to 59.8, and Services from 58.6 to 58.3%.  None of these numbers seem to be important enough to significantly move the pound even with poor numbers.  The COT report released Friday afternoon shows a small reduction in the spec long to 67,230 contracts, down from 71,304 last week.

Usually trading in a holiday-shortened week is a dull affair but this week might be different.  Monday is the final day of Q2 which is prone to window dressing to enhance the period's performance.  We also have the NFP at the same time ECB Draghi is holding his presser - that should end the week with some market action.
Ralph Shell, Excel Analyst
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