FOREX TRADING

Risk was in an indecisive mood today, as a deepening bond sell-off yielded to a strong bounce and equities opened high, then fell sharply, only to rise back toward the highs of the day into the close. The latter action was more or less mimicked by the commodity currencies, which sold off to varying degrees on the consolidation of the risk rally, only to push back stronger later in the day. Looking at our two lines in the sand for risk appetite, we’re about where we left in USDJPY and the S&P500 – right around the daily Ichimoku cloud resistance in the former and not far from the 200-day moving average in the latter. One of the more interesting moves elsewhere was a steep sell-off in gold, a development with no readily apparent catalyst, save for perhaps nervousness in positioning ahead of tomorrow’s big numbers.

Elsewhere, oil was up sharply, putting a floor under CAD for the moment, though USDCAD is well off the lows overnight. Tomorrow’s combination of Canadian and US employment data may be less important than the general direction in risk for the pair, which needs to pull back above the 1.0500 area to deserve more bullish technical interest. The US ISM Non-manufacturing survey was very slightly disappointing, but finally showed the employment sub-component inching slightly above 50 for the first time since December of 2007.

Again, European sovereign debt spreads continue to show no real relief, and today, CEE currencies were extremely weak on the news of an "informal" visit of the IMF to Hungary, which is the least credit-worthy of the three major CEE countries (with Poland and Czech Republic). This is a red flag for risk, as we discuss in the chart below. With that said, an auction of Hungarian bonds went off reasonably well (even if it fell a bit short of the government’s expectations), considering the generally nervous environment of late. More on this story over at zerohedge.

Chart: HUF and PLN and the DAX

Interesting to note that HUF and PLN (shown in the chart as HUFEUR in white and PLNEUR in red) led general risk the last couple of times around (not in December when the initial focus was exclusively on punishing the Euro and the market failed to see the spillover risk to all markets) in early February, when they rose before the DAX (in green) did and then in late April, when they weakened ahead of the DAX. Note the recent very marked divergence in the weak CEE currencies relative to a DAX that is trying to rally at present.

See our report from earlier today on how the high US initial jobless claims levels are able to coexist with the high non-farm payrolls totals and why tomorrow’s number is likely to come in very high due to one-off adjustments from US Census hiring and "birth and death model" adjustments. The more important number to pay attention to is the change in private payrolls, which we expect in a bit below consensus at 160k. The question tomorrow will really be about how the market is positioned for this number and whether it really cares when employment is a notoriously lagging indicator and in a world that should be perhaps more worried about the trajectory of economic activity as the public sector steps away from the stimulus that has enabled the growth of the last few quarters, the situation in the EuroZone and its sovereign debt and banking system (the big deal for global risk and currently showing no relief), the situation in China (worrisome considering the latest action in the equity market there), and the trajectory of US financial reform, which has yet to congeal into a definite shape.

Looking ahead

Tomorrow will provide a good litmus test for the market as we have been toying with this inflection point in the market for some time now. It looks like an either/or setup: either bonds collapse and risk rallies while JPY carry trades extend their recent ballistic action to the upside, or the markets get caught on the wrong foot as the "strong" data is already priced in and we get a chunky sell-off in risk. We favor the latter scenario as long as the EuroZone issue shows no relief, and even if this proves to be the wrong view for the shortest term, we would expect any risk rally to have little staying power.

In any case, stay careful out there.

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