Forex Market Update: Strong Rebound For Risk In US session, Is It For Real This Time?

Asia does not know which way to push it – Over to you…

HEADLINES - PREVIOUS SESSION

• US Mar. S&P/CaseShiller House Price Index out at +23.35% y/y vs. 2.5% expected and revised 0.66% prior
• US May Richmond Fed Manufacturing Index out at 26, as expected, vs. 30 prior
• US May Consumer Confidence out at 63.3 vs. 58.5 expected and revised 57.7 prior
• US Mar. House Price Index out at +0.3% m/m vs. flat expected and revised -0.4% prior
• US Weekly ABC Consumer Confidence out at -45 vs. -44 prior
• JP Apr. Corp. Service Price Index out at -1.1% y/y vs. revised -1.2% prior
• AU Mar. Westpac Leading Index out at +0.9% m/m vs. 0.5% prior
• AU Q1 Construction Work Done out at +1.9% vs. +4.0% expected and revised -0.2% prior
• JP May Small Business Confidence out at 46.7 vs. 46.8 prior
• SI Apr. Industrial Production out at 51.0% y/y vs. 20.7% expected and revised 46.6% prior

THEMES TO WATCH - UPCOMING SESSION

• GE GfK Consumer Confidence (0600)
• Sweden Trade Balance (0730)
• EU ECB's Paramo to speak (0740)
• EU ECB's Liikanen to speak (0800)
• UK BBA House Purchase Loans (0830)
• US MBA Mortgage Applications (1100)
• US Durable Goods Orders (1230)
• CA House Price Index (1300)
• US New Home Sales (1400)

Market Comments

On the face of it, the US session ended quite positively though the final closing levels of -0.23% for the DJIA, +0.04% for the S&P and -0.12% for the Nasdaq hid the fact that from the onset these indices had been almost 3% under water. Factors that triggered the second-half short squeeze included a very strong reading for US consumer confidence in May, jumping 5.6 points to 63.3, a 25-month high and some slightly better comments from S&P re possible bank downgrades, while moody's also affirmed the US government's AAA rating. In addition the rumours that had precipitated the sharp fall risk appetite, and associated risk currencies proved unfounded – namely and emergency ECB rate cut and North Korea's placing its military on combat-ready status.

Prior to these developments, Europe had seen an extension of the risk off theme from Asia, with EUR approaching once again the May low as the above-mentioned rumours circulated. The best reading for Euro-zone industrial orders in 10 years was largely ignored at the time, though GBP did benefit from a modest upward revision to Q2 GDP. In the second half of the US session the JPY crosses began to find a base and the u-turn in stocks was the trigger to bring EURJPY and AUDJPY both 3 big figures higher. So, was that a key reversal or another head fake? Technically the rebound was more credible perhaps a more bullish signal than Friday's, while the approaching month-end flows could have the potential to suggest that we have seen a temporary base in the risk currencies' recent dives.

The sharp turnaround in risk sentiment appears to have left most order books empty and Asia initially appeared stumped as to which direction to take. Fed chairman Bernanke was attending a BOJ conference and some comments hit the wires mid-morning, the most notable of which concerned the recent central bank USD swap agreements where he mentioned that it was not desirable to provide them as a permanent service for financial markets. This was enough to tip EURUSD back through 1.23 with stop triggers pulling the pair down to 1.2271. Elsewhere other currencies marched in tandem, but generally without panic and were staging a rebound by lunch.

Today's data calendar is a touch more heavily populated today German consumer confidence and Sweden's trade balance followed by UK BBA house purchase loans on tap. US durable goods orders and new home sales complete the session along with Canada's house price index.