Market Comments
Yesterday, the US House of Representatives narrowly rejected the so-called "oil speculation bill" that would have required position limits and the like in an attempt to prevent the accumulation of too many long positions by "speculators". The main reason for the bill failing to pass the vote had more to do with disagreement over expansion of drilling activity rather than the bill's core principles. This is a very dangerous area and market for the US legislature to be fiddling with as it would encourage the ambitions of oil futures exchanges elsewhere in the world (the bill theoretically also would have limited positions on foreign exchanges, but how in the world does the US expect to be able to establish authority elsewhere?) and could make the oil market far less liquid. The US Congress is scarily out of touch with reality. In any case, this news combined with a drop in gasoline inventories saw oil price rise sharply yesterday and they are now 6 dollars above recent lows. Oil could become a USD negative again if the sharp rise persists.
Any continued sharp rise in energy price could also interfere with the JPY's attempts to strengthen - which are otherwise beginning to look a bit more promising. Again, though, a stronger JPY story is strongest when the hattrick of falling equities, fixed income yields and commodities takes hold...something that declining global growth should eventually lead to, but that is not quite the case yesterday if we have a look at the equity part of the equation. Again, we see the equity strength as a temporary phenomenon that we would expect to reverse sooner rather than later. As an aside, EURCHF may develop altitude sickness soon as well for the same reasons that the JPY crosses may eventually decline...
Again, one aspect of the recent bout of USD strength that bothers us is that it seems somewhat tied together with the rally in equities, which we believe is unsustainable beyond the short-term. The S&P500 bottomed out on July 15 as did the USD. If the USD strength is to turn into a real trend, we will need to see it strengthening without the help of optimism in the risk appetite department - something that should be possible eventually - on the old recoupling argument and especially due to coming correction in emerging markets and their currencies. Also, as the growth picture sours again in the US, the market may have to price out some of the tightening it sees ahead from the Fed. But in the meantime, the question becomes how the USD would behave in the short term as we transition back to negative asset market developments. A key inflection point may lie ahead tomorrow or at next Tuesday's FOMC rate announcement and monetary policy statement on whether the greenback can continue strengthening or whether we see yet another sizeable throwback in USD weakness first.
Watch out for the US Q2 GDP first estimate today - the reason for the expected 2.3% annualized growth rate is most likely due to the cash handouts from the US govt. (the tax rebate checks) and the outright lies that go for inflation data these days. On a more positive note, the export side of the US economy has suffered little yet due to the USD's weakness.
The AUD was very weak yesterday with major levels giving way in the big AUDUSD and AUDJPY crosses and further bad news hit the wires last night in the form of the worst Retail Sales results in six years. Balancing out the bad news, was a wildly positive Trade Balance number for June and huge upward revision to the May number. New price hikes in iron ore and other commodities and decelerating import demand are creating a far better trade picture than expected. These more positive terms of trade will be key in preventing an AUD sell-off from turning into an AUD meltdown as the Australian economy goes through its own credit/housing/consumer contraction a la the USA in the coming quarters and as the RBA embarks on a cutting campaign already in the coming months.
Chart: USDJPY
The JPY crosses appear to be headed south this morning. USDJPY is looking a bit vulnerable to at least a short term correction as the momentum has come out of the rally of late and the last couple of highs have failed to hold. An obvious short-term correction target would be the area where the 200-day and 55-day moving averages are converging.
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