By Dean Popplewell
We are getting there ever so slowly, it will be done and that’s the early 1.21 trading handle of the single currency objective set out at the beginning of the week. The Eurogroup, Ecofin and Fed efforts are coming to naught while the risk aversion trend continues to pull the strings. Overnight action was again peppered with the release of more negativity especially across the Asian region. The highly anticipated Fed minutes yesterday could not hold the line. Their lack of action or perception has only allowed the risk trading noose to tighten. The minutes confirmed that the Fed has little appetite to enter another round of full balance sheet expanding QE anytime soon, and this despite the recent loss of momentum in the pace of US recovery.
Worries about a global slowdown are mounting ahead of tonight's Chinese growth data. This and the Fed’s unwillingness to move anytime soon has the EUR hovering around its two-year lows and not even pretending to bottom feed. The Asian currencies, minus yen, have been sold off after a poor Aussie jobs report. Their employment fell by-27k last month, much weaker than the consensus forecast for no change. Even the details were an eye sore. Full-time employment fell-33.5k, reversing the-36.4k rise in May, and what’s turning into being a new global phenomena, the participation rate also fell for the month. Analysts note that for Q1 as a whole, employment rose by a subdued +14k, while full-time employment dropped-10k. Bring back the Aussie economy of old!
Better than expected Chinese June loan releases did little to offset some of the negative compounding policy moves overnight. It seems that the recent easing cuts by the ECB and PBoC left its mark on South Korea. The BoK lowered its policy rate by-25bps to +3%, surprising the consensus forecast for no change. Apparently the decision was not unanimous and it was preemptive in response to rising external growth risks, and the weaker than expected domestic recovery. Obviously the country’s policy makers would have been concerned about future capital flows into developing economies following easing moves in other major economies. Also compounding regional matters was the BoJ only “tweaking” the details of its AP program, moving to buy more discounted bills and keeping the programs overall size unchanged. Policy makers failure to implement any clear mandate is only ever going to add to the markets nervous tone.
There goes another myth. Those who understand interest earn it; those who don’t, pay it does not add up anymore. The latest craze is negative two-year rates. This morning, German two-year note yield fell to a new record low of -0.021%. Yesterday, it was Dutch two-year product that moved into negative territory. Today, it has been the turn of Finland whose equivalent product has also fallen below zero. In five weeks, the bund/two year spread for Finland has tightened -14.5bp, while for Holland its been-14bps. However, the bigger moves have been left up to the semi-core euro countries of France and Austria, tightening -23.5 and -26bps respectively. The country playing the most catch up, Belgium, tightening a whopping-49bp to Germany. This narrowing only highlights investors strong desire to escape Germany’s negative yields.
Attempts to lift off the overnight lows have rather pathetic. The EUR seems to prefer to wallow amongst its two year low for now. The bias remains with the bears and fading single currency rallies seems to be the order of the day. The tech charts continue to show that prices are willing to ease again in line with the hourly studies. The short term target remains the up trend line of 2005 which comes in sub-1.20. Technically this bear trend remains intact unless we manage to penetrate last Fridays high above 1.24. The daily’s continue to head south in spite of the oversold levels. The OANDA’s retail positions are little changed. They have been buying EUR’s, going long and refuse to pare positions on this dip. Are they an indicator of what not to do? Further EUR weakness is expected as option expiry pressure left hand side continues to build up. It seems that the ball is back in China’s court.