China gets serious on stimulation China announced a massive CNY 4 trillion stimulus package over the weekend as the global economic growth deceleration is finally hitting the Chinese growth miracle with full force. This enormous package represents some 20% of Chinese GDP, making the puny 1-2% stimulus package ideas being bandied about by US lawmakers look puny in comparison. Some have suggested that growth rates of 5-6% would represent a truly hard landing for the China due to its historic shift to an industrial economy that creates massive pressures to increase the numbers of jobs as the population migrates from the countryside to the city. China will be sorely pressed to avoid this hard landing due to the imbalances in its economy that focus so heavily on production rather than consumption. For now, markets have decided that this is good news, but the rally in risk it has brought on is unlikely to last beyond the shortest term.
G-20 meeting
The G20 meeting over the weekend talked up coordinated action of various stripes and heavier involvement from the developing nations in stimulating its way out of weakening economic conditions. The UK's Gordon Brown is calling for coordinated action and is showing off to the world how willing he and Chancellor Darling are to pump up the UK budget deficit to an estimated 7% next year and in 2010. Things are not looking well for the pound, which is teetering on the precipice of new lows vs. the EUR (or DEM, really, since we are closing in on the weakest level since the mid-1990's here). We are a bit doubtful going forward of the developed world's commitment to developing countries as long as economic woes are keeping domestic pressures. Politicians are acutely aware that the voting public becomes very selfish in hard times.
US employment report
The US employment report was even worse than expected, with not only the nonfarm payrolls number coming in 40k worse than expected, but with the previous month's number also adjusted down a huge -125k. This sent the unemployment rate 0.4% higher to 6.5%, the highest level since 1994. We fear that the crunch in US consumption, which is such a large part of the US economy at over 70% and which hasn't seen a recession since a brief dip in the early 1990's, could send the unemployment rate far higher for the cycle as droves of service sector jobs are eliminated.
Heavy supply in new US treasuries this week
This week will be an interesting one for measuring the demand for US Treasuries, as the US treasury will auction some $55 billion of securities this week, the most in one week since 2004. The amount of issuance arriving in the coming year is mind-boggling and one wonders where the buyers will come from. If yields begin to rise due to insufficient treasury demand while economic data remains weak, this could add to pressure on the markets. Keep an eye on the US 10-year note futures, therefore. Signs of strong demand would be USD bullish.
CAD: still on borrowed time
The Canadian employment data for October released on Friday was far better than expected, but as we discussed, the Canadian economy has historically been closely coupled with the US economy and will not escape its growing negative drag. USDCAD should eventually try back toward the 1.3000 area and we would expect the pair to find support in the 1.1500-1.1800 area.
Key data on the way
This week's economic calendar is relatively quiet, with focus likely on the German GDP data out on Thursday and the US Retail Sales report for October, released on Friday and could show the weakest retail sales environment in the 16-year history of the survey.
Trading stance
We see the rally in risk appetite as an eventual opportunity to look for new entry levels to play the predominant trend/theme of global deleveraging. Keep an eye out for reversal patterns that suggest new entry points for going long the USD, JPY and CHF against the EUR and virtually any other currency.
As we all expected, the EURUSD range continues to tighten. A break (likely lower) from the range (triangle) is expected next week. The upper end of the triangle line is in the 1.29-12950 zone today and Monday and is resistance in the event of an advance.
USD/JPY
The larger USDJPY trend is down so strength should be sold. Evidence that favors a new low is the momentum extreme (RSI) at 90.86. As I've mentioned many times before, price extremes (highs and lows) rarely correlate with momentum extremes. Instead, price extremes occur with momentum divergence. Support begins at 96.
GBP/USD
"The GBPUSD is supported by a long term trendline that dates to 1985. I expect a larger bounce off of this line; regardless of the larger trend…the result would be a volatile range over the next several weeks before a break to a new low." The range to this point looks like the first two legs of a triangle with price now at the lower end of the triangle. A rally is expected to exceed 1.62 by next week.
USD/CHF
The USDCHF is testing a resistance line from late 2005 as well as a shorter term upward sloping resistance line. These lines combined with overbought and divergent RSI on the weekly and daily should lead to a drop that lasts at least a number of weeks.
USD/CAD
A wave 4 low may be in place for the USDCAD. A line drawn off of highs from late 2007 / early 2008 has probided support ahead of 1.13, which is the 4th wave of one less degree as well as the 50% retracement of the rally from .9817 (low of wave 2). If a low is in place, then price should remain above 1.16.
AUD/USD
Adoption of a bullish bias is warranted on a rally above .7022 or a drop below .6544. Until then, the AUDUSD is in no-man's land." The AUDUSD dropped below .6544 today, triggering the bullish bias. Price is expected to exceed .7022 next week.
NZD/USD
Kiwi is in a similar position (when compared to the AUDUSD). The rally to .6037 is either wave a or i within a larger rally sequence. Wave b or ii may be complete at .5742 but there is risk that the pair drops below .5742 before a solid base is in place that will lead to a larger rally.
BOE cuts massive 150 bps and sends GBP on a roller coaster ride. US employment report out today likely an ugly one.
Risk aversion rose yesterday in the late US session, but no big follow through in Asia so far. JPY crosses bounce back a bit.
MAJOR HEADLINES – PREVIOUS SESSION
• US Oct. ICSC Chain Store Sales out at -0.9% YoY vs. +0.7% expected
• Australia Oct. AiG Performance of Construction Index out at 36.4 vs. 31.8 in Sep.
• Switzerland Oct. Unemployment Rate rose to 2.5% as expected and vs. 2.4% in Sep.
• Germany Sep. Trade Balance out at 15.0B vs. 13.5B expected
THEMES TO WATCH – UPCOMING SESSION
Events Today:
• Norway Sep. Industrial Production (0900)
• Germany Sep. Industrial Production (1100)
• Canada Oct. Unemployment Rate and Net Change in Employment (1200)
• US Oct. Change in Nonfarm Payrolls (1330)
• US Oct. Unemployment Rate (1330)
• US Sep. Pending Home Sales (1630)
• US Sep. Consumer Credit (2000)
Today a pivot day
Despite the foreboding ahead of the US employment report, our "sixth sense" feels a bit uncomfortable in the shortest term looking for big further moves in risk aversion right here. The JPY crosses showed a lot of stability overnight considering the ugly close in the US and the AUDUSD consolidation has been very shallow, suggesting a background bid in risk. Still, let's see how the US employment report comes in and the market's reaction to it for a better read on where we may be headed next week. Today could be an important pivot day for risk.
