Risk FX Rebounds – But Will Relief Be Brief?

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Market Drivers Jan 11, 2015

Shanghai ends down -5% but EU sees some covering
AU jobs data shows some slowdown
Nikkei closed Eurostoxx -0.01%
Oil $32/bbl
Gold $1104/oz

Europe and Asia:
NZD Building Permits 1.8% vs. 5.1%
AU ANZ Job adverts -0.1% vs. 1.3%

North America:
CAD Housing Starts 08:30

Risk aversion turned to near panic at the start of week’s trade in FX today but investor sentiment calmed somewhat by the the time European bourses opened and risk off currencies reversed their gains on profit taking.

The open of Asian trade was very sloppy and with Tokyo out on holiday liquidity was very thin exaggerating the moves as USD/JPY dipped to 116.75 on fears of further weakness in Chinese equities. The Shanghai index did end up down more than -5% but risk sentiment peaked at the open of Asian trade and USD/JPY rest of the session climbing out of the cellar.

The euro which is now acting as a full on funding currency and is therefore trading inverse to risk on flows, peaked at 1.0970 in early Asian session and then proceeded to unwind its gains hitting a low of 1.0872 before finding some bids.

The reversal in risk currencies was driven by the pop in European equity indices which were up 1% in mid morning trade after being battered for most of last week.

The eco calendar was barren today with only a smattering of third tier data out of New Zealand and Australia. The ANZ Job adverts numbers dipped to -0.1% from 1.1% in what may be an ominous sign for this Wednesday’s AU employment report which is the marquee macro event this week. The remarkably strong labor data out of AU has been the main prop for RBA’s neutral monetary policy, but if the job numbers turn negative Mr. Stevens and company will feel enormous pressure to begin easing once again.

The rest of the day belongs to risk on/risk off flows as the North American calendar is empty as well. Last Friday’s NFP data while showing solid jobs growth, left many dollar bulls wanting more. The average hourly earnings component showed no gains at all indicating that US economy continues to generate jobs, but no income gains putting in question the need for any further tightening by the Fed. That may indeed be viewed as positive by stocks and today could see some bargain hunters step in on the open especially in European indices hold their gains. That in turn could push USD/JPY to 118.00 level while dropping euro to 1.0850. Still given the turmoil in Chinese economy, any rally today should be viewed as simply an opportunity to reload risk off trades at higher prices.

Boris Schlossberg
Managing Director

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