Commodities Routed, Central Bank Attitudes Shifting, RBA Stmt Next

Broad worries about economic weakness combined with a rush to the exits in crowded trades like oil, silver and EUR led to a rodeo-like day of trading on Thursday. We explore emerging shifts in market sentiment and what it means for currencies and gold. Later, Japan returns from holiday and the RBA releases its quarterly assessment.

FOUR HEADLINES TRIGGERED bulk of the abrupt change in sentiment in the past two days: 1) very weak ISM services report 2) yesterdays comments from Rosengren/Williams 3) Trichets omission of vigilance. 4) an 8-month high in US initial jobless claims at 474K vs. 410K exp.

Behind the headlines, there are two stories: 1) Paper wars, position squeezing and speculative flows overwhelmed some resource markets. 2) Central bankers and markets are starting to see signs of economic weakness. These stories are obviously not mutually exclusive, but they collided today and created a wicked round of risk aversion. The euro was easily the laggard, losing nearly 300 pips against USD and JPY. Brent crude fell $10.39 in the largest one-day decline since Jan 18, 1991. Silver fell another 11% for a nearly 30% weekly decline. Gold fell $40 to $1475. The 19-commodity CRB index fell the most since Dec. 2008.

As the dust settles on todays volatility, the focus will shift to central banks, as it always does. Markets are coming to the conclusion that: a) Growth is a bigger problem than inflation b) Central banks of the world will remain dovish ad infinitum.

If we separate the day-to-day noise from the underlying story, the losers are any central bank where any measure of tightening is priced in; the winners are JPY, CHF and gold. This is a story that has the potential to explode in the coming week; especially if tomorrows NFP report is soft. The market is pricing in a number close to 160K (about 20K below the economist consensus) but if we see a reading below 100K, the market will be overwhelmed by talk of QE3. Although the initial reaction for a soft NFP reading will be risk aversion (USD higher except vs. JPY/CHF), this may only be a one-day trade. After the knee jerk reaction, the dollar will resume its decline, especially against gold. It will also continue declining against JPY but the risk of fx intervention is acute.

Asia-Pacific Preview

Japan officially returns from holiday on Friday but liquidity will be well-below normal with many traders extending the Golden Week holidays into the weekend. Pay particular attention to talk of intervention in USD/JPY from the Japanese Ministry of Finance with the pair is hovering around 80.00. The risk of actual intervention in a holiday week and ahead of NFP is minimal. The market, however, will be looking for hints of what the breaking point is. Also keep an eye on EUR/JPY as it threatens support at 115.99.

At 0130 GMT, the focus will shift to Australia as the RBA releases the QUARTERLY STATEMENT ON MONETARY POLICY. This should offer some valuable insight into how the central bank sees inflation pressures developing. In Tuesdays decision, the RBA continued to say that policy is mildly restrictive and that in the year ahead inflation will be close to target. They warned, however, that upward pressure on longer term inflation is coming. We will look for clarity on these points and suspect that the report may be more hawkish than the market is expecting. But even if it is, the upside for AUD is minor given the current climate and yesterdays weak retail sales data.

By AB - AshrafLaidi.com Staff