Intraday Market Thoughts Archives

The selloff in commodities is now being exacbated uncertainty about the future of leadership at the People's Bank of China (PBOC). The contrasting picture with equities is highlighted by the climb in the S&P500/CRB ratio, hitting 12-year highs, up 101% from August 2011, and 158% from the lows of June 2008. Full charts & analysis.

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Thursday was one of those trading days where analysts struggle for answers as fear takes over. We're comforted that bonds and FX didn't show anywhere near the level of fear as stocks. The Nikkei closed at a 7-year high on Thurs and a vast slate of data is coming up in the day ahead. The latest Premium trades include AUDUSD, 1 of which is in progress.

There wasn't a clear catalyst for the risk-off trade on Thursday. Analysts stretched in pointing at talk of Russian sanctions and comments from the Fed's Fisher. There were rumors of a high-yield hedge fund forced to liquidate but there are always rumors.

We continue to focus on China. Rumors that PBOC leader Zhou haven't been beaten back and talk about infighting in Beijing and the PBOC continues so we suspect there is some truth to this. Our friends at MNI are especially well-connected with their coverage.

In the short-term, who replaces Zhou and why is less important than the event of change itself. Change creates uncertainty and that's negative for risk trades and commodity currencies. So it's no surprise that the antipodeans were major laggards Thursday.

At the same time, Wheeler delivered a master class in jawboning. His unscheduled statement didn't say anything new but it was timed to break the March lows and send the kiwi to the lowest of the year. Jawboning works best when it's going with the momentum and the 2% fall in NZD/USD was more evidence.

The fall was even steep in NZD/JPY and that's where the focus will remain in the hours ahead. The main event is CPI at 2330 GMT. The consensus is for headline CPI up 3.3% but 1.7 pp of that is from the consumption tax hike. If the numbers are soft it could move BOJ action up the agenda.

Also keep an eye on the Nikkei, it hit a marginal 7-year high on Thursday but could be vulnerable to a reversal after the latest round of fears.

Opposing reports have been coming out of the PBOC and after the latest reports, we have an idea why. On Tuesday, the Aussie was the best performer while the Swiss franc lagged in a classic risk trade. RBA Governor Stevens speaks later. A new set of Premium Insights will be issued later tonight.

We were whipsawed by opposing news on China. The first reports said the PBOC didn't want to act to stimulate the economy in order to squeeze out some financial excesses. Just days later the PBOC pumped 500B yuan in liquidity into the five largest banks.

The reasons for the opposing reports might now be more clear – there's a power struggle at the PBOC. The WSJ reported today that long-time Governor Zhou may be replaced by someone more open to stimulating the economy and less in favor of financial reform.

The news helped turn around commodity currencies midway through the day.

It could do much more than that if it means China will continue to stimulate the economy and demand 7.5% growth. Down the road, that sets China up for a hard landing but in the short term and for the remainder of the year it could be a fantastic boost to commodities currencies. A new set of Premium Insights will be sent to subscribers shortly after this IMT.

We warn that the reports aren't confirmed and it's far too early to tell who will replace Zhou but it bears close watching.

Up next, RBA Governor Stevens speaks in Melbourne at 0030 GMT. We'll watch out for comments on the Australian dollar and housing.

The Canadian dollar remains is the only currency to have rallied against the USD over the last six months. We anticipate fresh buying USDCAD later this evening when Bank of Canada Deputy Governor Timothy Lane delivers a speech at 15:05 Eastern (20:05 BST). More charts & analysis.

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The New Zealand dollar fell to a one-year low on Tuesday, taking out a significant technical level. The pound was the best performer as real money continues to return while the commodity bloc suffered. The calendar is light in Asia.

The New Zealand dollar twice briefly slipped below the March low to a one-year low after a swift slide in US trading. The 0.8050 zone of support is key. The second foray lower came after Fonterra cuts its milk price forecast but later the kiwi bounced to 0.8070.

Perhaps more importantly, a falling New Zealand dollar often demonstrates stress elsewhere in the system. In this case, it's in emerging markets and China as the Fed gets closer to hiking rates. The kiwi has fallen more than 700 pips in a two month span 4 times since the crisis. The average high-to-low drawdown in the S&P 500 during that period was 7.1%.

What's also becoming clear is the insatiable appetite for US dollars. The dollar came into US trading lower against the euro and pound but completely recovered against both. Dip buyers are abundant and will remain so in anticipation of a hawkish shift at the Fed.

That makes us wonder if we should be watching out for the thing no one expects – a dovish shift at the Fed. It sounds crazy but inflation has stopped rising.

Three events to watch for in Asia-Pacific trading are Australian Aussie skilled vacancies, the leading index from Australia and a speech from the Fed's George at 0130 GMT. 

The opacity and frequent false alarms about Chinese growth have left traders jaded but the concerns are mounting. The commodity bloc suffered to start the week as those fears percolate while the pound led the way as the real money flows we wrote about yesterday return. But the main focus will remain on China with the manufacturing PMI due next. 

All areas of Chinese growth are suspect and last week's surprise liquidity injection left of us two minds. The willingness to act by China's central bank was proactive and crushed speculation they were going to sit on the sidelines. On the flipside, perhaps they wanted to stay on the sidelines but were forced to act based on the severity of circumstances.

This week worries focus on the property market and that has been a perpetual focus because of the abundance of evidence of shady financing and rapid price rises.

If any of the fears prove to be substantiated the floors for the commodity currencies (and commodities themselves) could be much lower.

The focus now shifts to the Chinese flash manufacturing PMI at 0145 GMT. The consensus is for a slide to 50.0 from 50.2. A slide to 49.9 or lower would be a psychological blow at a delicate time as it also indicates a contraction.

Otherwise, watch for comments from Fed dove Kocherlakota at 2330 GMT. A less dovish tone would signal a broader shift at the FOMC and Kocherlakota is known to change his mind.  

Gold's 10% decline to fresh 8-month lows from its July highs emerges on a simultaneous rally in bond yields and the US dolla. Considering the US dollar is rallying in ways not seen since 2005, gold weakness is here to stay. Full charts & analysis

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The New Zealand dollar starts the week a quarter-cent higher after John Key secured his third term as PM. Last week the Canadian dollar was the best performer while the yen lagged. Interestingly enough, the latest CFTC data shows that bets against the yen aren't as crowded as you might think.

The Asia-Pacific calendar starts the week off quietly but the market breathed a sigh of relief as Key won 61 seats in the 121-seat parliament. An extra 4 seats from coalition members gives him a solid majority. The result was generally expected but NZD/USD perked up to 0.8155 from 0.8120 at Friday's close.

Other moves have been small but we note some minor GBP/USD strength in what could be a sign that frightened real money that exited the pound during the referendum fright is creeping back in. That will be a theme to watch in the weeks ahead.

On the weekend, the G20 communique refrained from rocking the boat in any way by avoiding all mention of Russia.

The euro is flat so far but could get a lift after Moody's affirmed France's rating late on Friday despite rumors of a downgrade. That could be counteracted by weekend comments from ECB governing council member Coeure who said the ECB is ready to act again if needed. He hedged that by saying it's too early to judge the impact of the latest measures.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +. EUR -137K vs -157K prior JPY -83K vs -101K prior GBP -6K vs +27K prior AUD +22K vs +41K prior CAD +8K vs +12K prior CHF -11K vs -14K prior NZD +1K vs +10K prior

We'd caution against reading anything into the GBP numbers because they were very fluid before and after the polls.

What stands out is the lack of conviction in USD/JPY longs. 83K is a decent sized position but given the past enthusiasm for the pair, don't be surprised to see that get a lot more crowded. It gives us optimism that 1.10+ is possible.