That broken old city, Detroit
The bankruptcy laws did exploit
For fifty long years
They’ve suffered with tears
From leadership quite maladroit
As an indication of just how dull the overnight session was in the FX market, the Detroit bankruptcy story is probably the biggest thing going right now, and it is having no impact in the global markets. We continue to feel the angst from the political problems in Portugal, and it seems Italy is closer to its government collapsing, but neither of these issues is having any impact on the euro. In fact, the euro continues to perform far better than can reasonably be explained by the data and news that has been released over the past week or so. Support for the single currency is remarkably robust despite its myriad problems, and I attribute that to continued reserve diversification from the Asian and Middle Eastern central banks. I understand that Bernanke has continued to walk back the tapering discussion, but it feels like that is old news at this point. The euro’s performance feels much more like a single, or small group, of buyers sitting on the bid rather than a broad group of buyers actively acquiring euros. It just seems to me that the price action and the information stream are out of synch. We shall see, but I find it hard to believe that an imminent no-confidence vote on the Italian government can be helping the single currency. However, for now, it appears that the support remains strong. None of this has changed my medium and long term views, and I continue to advocate receivables hedgers taking advantage of the current levels.
This weekend we get two events of note starting with the G20 meeting in Moscow this afternoon and tomorrow, followed by the Japanese Upper House election on Sunday. The G20 appears to be focused on tax issues, trying to close the loopholes amid the treaties that allow corporations to reduce their taxes so dramatically. Ultimately, if they can create an efficient way to do that, it can only be a net positive for the entire global economy. Alas, the key is the efficiency, and nothing the G20 has ever done could be considered efficient. Overall, I see no reason to expect the G20 to impact FX markets. As to the Japanese election, the polls point to PM Abe’s LDP winning a majority, and it could be a strong one. I continue to believe this will be a catalyst for the next leg of yen weakness as once Abe consolidates his power he will be able to enact more legislation to implement his ‘third arrow’ and with luck, address some of the long term underlying issues in Japan.
The data overnight was completely uninspiring with the UK borrowing data likely the most interesting and it had no impact. We do see Canadian CPI this morning, but Canada has been an afterthought to the FX markets for the past several months, tracking the general USD movements but showing no leadership at all. I don’t imagine this data is going to change things there.
In the Emerging Market space, the dollar is generally weaker ahead of the LATAM opening, but most of the movement has been quite modest. There has been very little in the way of news here either, as markets seem to be taking a summer vacation. It is hard to get excited about much in this space right now as most of the movement here is predicated on the Fed’s actions. If the Fed is going to maintain QE3 for much longer then these currencies are going to regain their favor given the large yield advantage that still exists. However, if the taper does begin, I expect that this entire bloc will suffer dramatically, as it did last month when that was the general expectation.
It is a summer weekend and the Open Championship is on every trading room TV. My guess is we see very little activity today overall.
Good luck and good weekend