Risk Aversion Likely to Re-emerge, Soon!
15/06/10 22:58
Following a strong week (no oxymoron intended) and
positive risk tone, the market is potentially setting
up for another round of risk aversion. Greece has
been downgraded to JUNK status and will continue to
act as a proxy for non producing regions within the
EMU. We move out of long risk - AUD and NZD against
USD and JPY and wait for pullback to reenter. Notice
the characteristic of risk rallies.
We will be announcing a Live Trading Workshop soon.
Much attention has been paid in recent months to the diverging bond yields of Eurozone sovereign issuers. Germany has seen bund yields fall to historic lows on safe haven demand, while yields on short-dated Greek debt had, until recently, been amongst the highest in the world.
The activation of the EU/IMF financial rescue package for Greece led to some tightening of the yield spreads between peripheral and core economies. Furthermore, the creation of the Eurozone stabilization fund, combined with aggressive outright bond purchases by the ECB, also had a stabilizing effect. However, little attention during this time has been paid to the flow of deposits between the banking systems of different Eurozone economies, driven presumably by changing investor opinion about the relative stability of regional banking systems.
We will be announcing a Live Trading Workshop soon.
Much attention has been paid in recent months to the diverging bond yields of Eurozone sovereign issuers. Germany has seen bund yields fall to historic lows on safe haven demand, while yields on short-dated Greek debt had, until recently, been amongst the highest in the world.
The activation of the EU/IMF financial rescue package for Greece led to some tightening of the yield spreads between peripheral and core economies. Furthermore, the creation of the Eurozone stabilization fund, combined with aggressive outright bond purchases by the ECB, also had a stabilizing effect. However, little attention during this time has been paid to the flow of deposits between the banking systems of different Eurozone economies, driven presumably by changing investor opinion about the relative stability of regional banking systems.
Bank economics teams expect ECB policy rate first
hike in 2011Q2, rather than Q1. Their rationale is
that looser monetary policy will be needed to offset
the effects of fiscal tightening. They also see
little prospect of a near-term resolution to the
Eurozone's debt crisis.
UK CPI for May is due later today and any surprises are likely to be a significant driver for sterling. As seen in Chart 1, inflationary pressures have been building inside the UK economy since September 2009, and current levels remain well above the BoE's medium-term target of 2%.
Although such elevated levels would confirm the existence of ongoing price pressures, we think this gradual deceleration in CPI will continue over the coming months. Further downward pressure will likely be exerted by the introduction of UK austerity measures, as well as weakening demand from both inside the Eurozone and across the wider developed world as the sovereign debt crisis takes its toll on sentiment.
Consequently, we remain cautious on sterling, and are alert to the risk that an unexpectedly large decline in CPI over the coming months could prompt the BoE to consider a resumption of QE. To cover this possibility, and in light of the upcoming SNB policy decision on Thursday
Newspaper articles have speculated for some time that the BoE could be forced into a pre-emptive rate hike in a bid to head of inflationary pressures. This speculation intensified after April's unexpectedly high print of 3.7% y/y and some observers have gone so far as to attribute sterling's recent recovery, at least in part, to the possibility of such a hike.
RBNZ Governor Bollard struck a very cautious tone as he issued a series of warnings on the imbalances still present in the domestic economy. He noted that "household balance sheets do not look healthy" and "New Zealand is one of the very few developed counties with net external liabilities so high". He went on to observe that credit rating agencies take note of overall external indebtedness and that "the sheer size of servicing our obligations could become an intolerable burden to the country". NZDUSD strength is likely to be limited.
On Tuesday, the minutes from the RBA June policy meeting are due. We will be looking in particular for clarification on why the policy board left the cash rate unchanged, and how soon they may consider hiking again. A tight correlation between risk currencies and equities remains. We look to sell any rallies from current levels.
Chris Lori, CTA
www.chrislori.com
UK CPI for May is due later today and any surprises are likely to be a significant driver for sterling. As seen in Chart 1, inflationary pressures have been building inside the UK economy since September 2009, and current levels remain well above the BoE's medium-term target of 2%.
Although such elevated levels would confirm the existence of ongoing price pressures, we think this gradual deceleration in CPI will continue over the coming months. Further downward pressure will likely be exerted by the introduction of UK austerity measures, as well as weakening demand from both inside the Eurozone and across the wider developed world as the sovereign debt crisis takes its toll on sentiment.
Consequently, we remain cautious on sterling, and are alert to the risk that an unexpectedly large decline in CPI over the coming months could prompt the BoE to consider a resumption of QE. To cover this possibility, and in light of the upcoming SNB policy decision on Thursday
Newspaper articles have speculated for some time that the BoE could be forced into a pre-emptive rate hike in a bid to head of inflationary pressures. This speculation intensified after April's unexpectedly high print of 3.7% y/y and some observers have gone so far as to attribute sterling's recent recovery, at least in part, to the possibility of such a hike.
RBNZ Governor Bollard struck a very cautious tone as he issued a series of warnings on the imbalances still present in the domestic economy. He noted that "household balance sheets do not look healthy" and "New Zealand is one of the very few developed counties with net external liabilities so high". He went on to observe that credit rating agencies take note of overall external indebtedness and that "the sheer size of servicing our obligations could become an intolerable burden to the country". NZDUSD strength is likely to be limited.
On Tuesday, the minutes from the RBA June policy meeting are due. We will be looking in particular for clarification on why the policy board left the cash rate unchanged, and how soon they may consider hiking again. A tight correlation between risk currencies and equities remains. We look to sell any rallies from current levels.
Chris Lori, CTA
www.chrislori.com