No deal for Argentina: default imminent

Argentina eventually entered into a state of default for the second time in 12 years as the holdouts and the Argentine government failed to reach an agreement. Credit rating agency S&P cut the county’s rating from CCC- to Selective Default.

Economy Minister Axel Kicilloff offered holdouts to restructure their debt within the same conditions agreed in the 2005 and 2010 swaps, but they refused and the $539 million interest payments haven’t due to holders of Argentine restructured debt won’t be made. Even if it deposited the full amount in the Buenos Aires account of trustee agent Bank of New York Mellon, the bank couldn’t pass it on as Argentina had to agree to settle with them.

MI-CE248B_ARGBO_G_20140730142403

(Source: the WSJ)

Japan Exports: Back Before Abe…

Last night, data continue to disappoint in Japan as we saw that the June exports drop 2.0% YoY, far below the 0.7% rise expected and down from +18.5% back in October last year. I picked the chart below from Zero Hedge, which shows the evolution of Japanese Exports (black line) since Abenomics (December 2012) against market’s expectations (orange line). As you can see it, we are back to levels we were before Abe took office in the last quarter of 2012, raising doubts about the Abe-Kuroda strategy. On the other hand, imports increased 8.4% from the same year earlier.

image001

(Source: Zero Hedge)

The Finance Ministry reported that the Trade Balance deficit widened to 822bn Yen in June (vs 643bn Yen expected) and reached the two-year mark last month as exports failed to keep pace with surging imports. In the first half of the year, Japan’s trade deficit soared to a record 7.6tr Yen and is expecting to remain in the red area for the long term, which is becoming a serious issue for Japan PM Abe.

The Yen remained steady against the greenback on the news and has been trading within a tight 30-pip range (101.30 – 101.60) for the past few days. I believe that USDJPY looks vulnerable to the downside, and the first strong support stands at 101.00 (there are buyers around 101.00/10 and some at 101.25). As I mentioned it previously, a quiet equity market in Japan (Nikkei is range trading between 15,000 and 15,500) in addition to low US yields (10-year is back below the 2.5% since last week and now trading at 2.48%) make it difficult for the Yen to depreciate against the US Dollar.

JPY-24

(Source: Reuters)

Important figures to watch tonight are Japan June inflation data. The recent spike we saw after the sales tax increase (from 5 to 8 percent on April 1st) eased market’s expectations of further easing in the coming months, therefore capping USDJPY on the topside. The May nationwide core CPI rose 3.4% in May from a year earlier, the fastest since 1982, and is expected to ease down to 3.3% in June.
Even if I feel that USDJPY will remain under pressure in the coming weeks, I would position myself on EURJPY at the moment after the spike we saw on the Euro. Short a current levels (137.00) with a first medium term target at 134.50.

Fighting against the Aussie…

An interesting development overnight was the Australian Q2 inflation data which is approaching the higher band of the 2-3% RBA target range. Australia’s trimmed mean CPI, the indicator the RBA officials look at which excludes volatile items that are included in CPI, rose from 2.6% to 2.9% in the second quarter (expected at 2.7%). The news lifted the Aussie to 0.9450 against the greenback as it slowed down the market’s expectations of another rate cut further this year.

AUDUSD started to recover from its last-week ‘losses’ after RBA Governor Stevens didn’t mention anything about the exchange rate overvaluation at a charity lunch in Sydney on Tuesday. As you can see it on the chart below, the increase in the 2-year AU-US yield spread (in blue) has pushed AUDUSD (yellow bars) to higher levels and the pair is now flirting with its resistance at 0.9460. A breach of that level could easily bring us to the next resistance area 0.9475 – 0.9500 (which corresponds to levels we saw in the beginning of the month).
I remain bearish on the Aussie and I think that a bounce back above 0.9500 could be another interesting level to start shorting the pair with a stop loss above 0.9560. My medium term target remains at 0.9200.

AUD-Spread

(Source: Reuters)

Another graph that I like to watch is AUDJPY. As you can see, the pair is approaching its first strong resistance at 96.00 (currently trading at 95.90). It seems that the market has been rejecting AUDJPY above this level over the pas few months, and for those who are not convinced on the AUDUSD trade, it could be also interesting to enter a short position on AUDJPY at current levels, with a stop loss above 96.60 and a first target at 94.60.

AUDJPY-23Juy

(Source: Reuters)

Quick BoE Minutes review

As expected, the Committee voted unanimously in favour of maintaining both the Official Bank Rate and the stock of purchased assets steady at 0.5% and £375bn respectively. Since Carney’s speech at the Mansion House in the middle of June, the Bank of England will be the first ‘G7’ central bank to experiment a rate hike and the market is pricing it for early 2015 (February according to Reuters’ polls).

The minutes enhanced today the importance the ‘qualitative guidance’ and stated that even though the unemployment rate keeps decreasing at a faster pace than the Committee anticipated (currently at 6.5%, down from 7.6% in August 2013), the ’employment growth over the past year had been concentrated in lower-paid sectors’ which is problematic for the outlook of household spending. For instance, if we have a look at the Average Weakly Earnings (ex bonuses), British workers’ earnings grew by an annual 0.7% in the three months to May, its slowest rate on record.

STIRs and Cable:
If we look at the short-sterling interest rate futures (March15 contract), interest rate traded on LIFFE London, we can see that the implied rate (100-price) increased by 26bps to 1.17% in mid-June before edging back to lower levels (currently trading at 1.03%). The 2-year UK-US spread (see below in red), a popular Cable driver that the market watch since Carney introduced ‘forward guidance’ back in August 2013, peaked at 43.7bps in Mid June and is now trading 8bps lower at 36bps.

UK-spread

(Source: Reuters)

The rise in UK yields based on a hawish BoE tone raised interest for the British pound against the major currencies; short EUR/GBP (monetary policy divergence) and long GBP/USD (based on a macro perspective and BoE being more ‘active’) have been popular trade to hold.

However, Cable has been trending lower for the past couple of weeks and hasn’t managed to break the 1.7200 level last week with the Fed making a move also on its rate policy (Yellen’s Testimony, see article Markets after Yellen). The pair is trading at 1.7050 at the moment and seems on its way to re-test the 1.7000 – 1.7020 area in the short term. Some bids are seen in this area, however I would suggest waiting for 1.6960 – 1.6970 for a buying-on-dips opportunity.

Figures to watch this week:
Tomorrow (July 24): UK Retail Sales, expected to increase by 0.3% MoM in June
Friday (July 25): First Q2 GDP estimate, expected to grow by 0.8% QoQ

Euro under pressure…

Last week, the Euro broke below the 1.3500 level against the greenback for the first time since February. As the ECB is still not done with the easing (perhaps public QE if low inflation persists), it is clear that the risk remains on the downside for the single currency. However, I do believe that the decrease will be slow and gradual….

EURUSD is now trading around its 38.2% Fibo retracement (1.2750 – 1.4000) as you can see it on the chart below. We think that the 1.3500 level will act as a strong support, however a higher-than-expected inflation figure in the US this afternoon (expected at 2.1%) could push the pair to lower levels… 1.3470 to begin with.
For those who missed the trend, any bounce back above 1.3600 could be a new good opportunity to start selling the pair.

Data to watch:
Today (July 22): US June CPI YoY (exp. at 2.1%)
Thursday (July 24): EZ July Flash Mfg PMI (expected at 51.7)

EUR-22

(Source: Reuters)

Markets after Yellen…

There have been some interesting developments for the past few days in the middle of this low-volatile environment. Firstly, Fed Chair Yellen opened two days of testimony on Capitol Hill yesterday, delivering the central bank’s semi-annual report to Congress. With the QE-Taper to end in October (already priced in), the market was waiting for more details concerning the ‘future path’ of the Fed Funds target rate (currently at a historical low of 0-0.25%). Despite strong employment data with Non-Farm Payrolls printing above the 200K level for the fifth month in a row in June (288K) and the jobless rate that edged down by another 0.2% to 6.1% (2008 levels), Yellen clearly stated that the US economic recovery ‘is not yet complete’ with the housing market showing ‘little progress’ but still disappointing this year.

However, she surprised the market a bit when she told the Senate Banking Committee that rates could rise sooner than planned. These comments ‘kind-of’ played in favour of the US Dollar, with USD index trading 80.50 at the moment. Its main component, the Euro (57.6%), broke out of his tight 1.3575 – 1.3675 range and is now trading at 1.3540 (see chart below). The next support on the downside stands at 1.3520, the 38.2% Fibonacci retracement of 1.2750 (July 2013 low) and 1.3992 (May 2014 high).

EUR-16-Jul

(Source: Reuters)

The second interesting development was the higher-than-expected CPI figures in UK that gave a boost to Cable after its last two weeks of weakening momentum. Annual inflation came in at 1.9% YoY in June (vs expectations of a 1.6% print), while CPI MoM increased by 0.2% (vs -0.1% consensus). It reinforced the market’s view that the BoE will be the first major central bank to lift rates. Even though some analysts are expecting a first move from UK policymakers later this year, I personally think that Q1 2015 sounds more reasonable. If we have a look at short-sterling interest rate futures, the March 2015 contracts sold off to 98.91 from 98.97, which means that the implied yield from 103bp to 109bp. Earlier this morning, UK claimant counts fell by 36.3K in June, following a revised 32.8K drop registered in May. The jobless rate edged down to 6.5% as expected.

After it reached a high of 1.7191 yesterday afternoon, Cable remains poised for a break above 1.7200 and is now trading at 1.7125. The first support on the downside stands at 1.7100, followed by 1.7060. A more interesting pair would be EUR/GBP, which is now trading at a 22-month low at 0.7900 and is approaching its next support at 0.7880 (see chart below).

EURGBP-16-Jul

(Source: Reuters)

Another surprise came from New Zealand where inflation accelerated less than expected, easing pressure on the RBNZ to continue its monetary policy tightening cycle. As a reminder, the central bank has increased its overnight cash rate (OCR) three times to 3.25% since the beginning of the year, and the market is still expecting a 25bps rate hike at the next meeting on July 23rd. I felt that the Kiwi strength would probably weigh on NZ policymakers’ decision at the next meeting, therefore I was expecting a correction on NZD (see my last trade short NZD/JPY). It was also interesting to play a technical bear correction on NZD/USD when the pair was flirting with its 3-year high as you can see it on the chart below.

NZD-16Jul

(Source: Reuters)

Quick update on BoJ and the Yen: USDJPY continues to trade sideways after the BoJ decided to keep its monetary policy unchanged (as expected), maintaining its target of increasing the monetary base at a annual pace of JPY60-70tr per year. The central bank cut its 2014 growth prediction to 1.0% (down from 1.1% last meeting and from 1.5% last October), but the board (9 members) unanimously maintained its inflation projection of 1.9% in the next fiscal year. If we have a quick look at the chart below, USDJPY is still trading within its tight 101.00 – 103.00 range. It found support slightly above the 101.00 level last week and seems on its way to test its next resistance at 101.94 (200-day SMA).

JPY-16-Jul

(Source: Reuters)

To finish, another currency AUDUSD that I have been trying to play lately is AUDUSD. The RBA minutes didn’t surprise the market on Tuesday despite AU policymakers’ willingness to see a lower Aussie (the minutes stated ‘the exchange rate remained high by historical standards’). I still think it is interesting to go short AUDUSD if the pair trades above 0.9400, with a medium term target at 0.9200 and a stop loss above 0.9560.

AUD-16Jul

(Souce: Reuters)