Market Starts the Week with Another Attempt at Reinvigorating the USD Carry Trade

This is Thanksgiving Week in the US and end of the month trade is in play ahead of next Monday.

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Oct. Visitor Arrivals fell -0.7% vs. +3.8% in Sep.
• Australia Oct. New Motor Vehicle Sales rose 3.3% YoY vs. -1.8% in Sep.
• Germany Nov. Preliminary Manufacturing PMI out at 52.0 vs. 51.6 expected and 51.0 in Oct.
• Germany Nov. Preliminary Services PMI out at 51.5 vs. 51.2 expected and 50.7 in Oct.
• EuroZone Nov. Preliminary Manufacturing PMI out at 51.0 vs. 51.2 expected and 50.7 in Sep.
• EuroZone Nov. Preliminary Services PMI out at 53.2 vs. 52.9 expected and 52.6 in Oct.
• Canada Sep. Retail Sales out at +1.0% MoM and 1.1% less Autos, vs. +0.6%/+0.4% expected, respectively

THEMES TO WATCH – UPCOMING SESSION

(All times GMT)

• US Oct. Existing Home Sales (1500)
• Australia Sep. Conference Board Leading Indicators (2300)
• Japan BoJ Monthly Report (0500)

Market Comments:

Last week's developments for the risk bears turned out to be just another tease so far: AUDUSD broke the trend - but only briefly and intraday in what may have simply been a running of stops on the market's most nervous hands. The US 10-year benchmark yield eased lower through the rising trendline, but the 200-day moving average held exactly and yields have popped back higher to start the week. As for EURUSD, the range is still the range and daily direction changes are still the order of business. One of the key moving average supports for the EURUSD rally, the 55-day moving average, has now risen to almost the same level as the flatline support at 1.4800, so that area is taking on added significance if tested again in coming days. In the JPY crosses, EURJPY hammered on the 200-day moving average for three days, but has now rallied sharply on bonds weakening in the face of the risk buying spree to open the week.

Model inputs

Looking at model inputs for currency levels, we expressed the idea last week that the sell-off in risk had brought the USD back into relative neutral alignment with the models after having appeared a bit underpriced, but also suspected that the risk correction might have further to run. This latter idea has certainly been rejected to start the week. The ring-leader for the new attempt to get the USD carry trade back on track has been the jump in gold prices, which rocketed higher from the start of Asian trading to a new record high already 17 dollars higher (as of this writing) than the previous record last week. This move in gold and recent news of Asian central banks buying up IMF reserves and clearly looking for USD alternatives is certainly a driver, but gold has also taken on a life of its own against all currencies, as it is currently trading close to its all time high vs. the Euro of around 783 Euros/ounce.

Euro's fundamental supports

Looking at interest rate spread inputs, the spreads for the likes of AUD and CAD have been stable for a week now, as those currencies focus on the wiles of commodity and risk moves. The real standout has been the Euro, where the last ECB meeting was hawkish enough to trigger fairly significant moves in the spreads in favor of Euro. From that perspective, and if risk remains supportive, a move through the higher end of the recent EURUSD range now appears the scenario of least resistance. Against the same interest rate measures, EUR looks underpriced vs. the commodity currencies as well.

Fed flexibility

The Fed's Bullard was out overnight arguing in favor of flexibility if the US economy proves weaker than expected, with "flexibility" meaning potentially extending the largest of its QE measures - the purchase of mortgage-backed securities - beyond the end of March deadline now established by the recent Fed monetary policy statements.

Economic Calendar this week

We have a relatively interesting US economic calendar this week, with everything packed into the next two days as Thursday and Friday are holidays this week in the US. One wonders how much the month-end trade may enter the scene already tomorrow and Wednesday, though the actual end-of-month fix takes place next Monday.

Tuesday

• Germany Nov. IFO - has risen every month since the March low - watch the divergence in expectations vs. present situation once again
• Norway Q3 GDP - Norway's data has been less promising than hoped and the NOK rally vs. the EUR has stalled for some time now.
• US Q3 GDP, 1st revision - a rather large downward adjustment expected in line with Goldman Sachs explanation related to initial estimates overestimating small business contribution to growth
• US Oct. CaseShiller Home Price Index - ticking up slightly month-on-month for last three months
• US Nov. Consumer Confidence - last month a real disappointment
• US FOMC Minutes - focus on whether dovishness is as evident in the minutes as it was in the statement

Wednesday

• US Oct. Durable Goods Orders - year on year comparisons are still dire in many categories
• US Nov. Final University of Michigan Confidence - initial Nov. reading was very disappointing
• US Oct. New Home Sales - last month's data extremely disappointing - is housing double dipping?

Thursday

• Norway Oct. Unemployment
• Germany Oct. CPI - year-on-year comparisons expected to show a positive reading for the first time since June

Friday

• New Zealand Oct. Trade Balance - heading the wrong way as recovery has swung into gear
• Japan Economic Data - the big monthly release of Employment, Spending, CPI and Retail Trade Data
• Sweden Q3 GDP and Oct. Retail Sales - SEK going nowhere vs. EUR for months now
• Switzerland Nov. KOF Swiss Leading Indicator - Swiss economic data on a strongly improving course - will the SNB relax its vigilance at some point?

Chart: EURUSD

With the rally in risk back on and interest rate spreads giving the Euro perhaps the most support at the moment among the major currencies vs. the USD, we should perhaps look at EURUSD as the most likely USD pair to show the USD falling to new lows if the risk rally continues. The pivot this week in EURUSD is down at 1.4894.

Saxobank

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