JPY and CHF finally strike back on bond rally and equity sell-off. USD weakening and close to important support levels again.

JPY and CHF moves yesterday were a jolt to recent patterns as we may be seeing a cycle change in the risk appetite axis of FX

MAJOR HEADLINES – PREVIOUS SESSION

• New Zealand Q1 GDP out at -0.3% QoQ as expected
• New Zealand May Trade Balance out at  -195.8M vs. 150M expected
• Japan May Jobless Rate out at 4.0% as expected
• Japan May Household Spending out at -3.2% YoY vs. -2.0% expected
• Japan Jun. Tokyo CPI out at 1.5% YoY vs. 1.2% expected and ex Fresh Food, Energy at 0.3% YoY vs. 0.2% expected
• Japan May National CPI out at 1.3% YoY as expected and ex Fresh Food, Energy at -0.1% YoY vs. 0.0% expected
• Japan May Industrial Production out at 2.9% MoM vs. 2.7% expected
• Japan May Retail Trade out at -0.2% MoM vs. -0.5% expected

THEMES TO WATCH – UPCOMING SESSION
Key Risk Events (All times in GMT)

• France May Producer Prices (0645)
• France Q1 Final GDP (0650)
• Sweden May Retail Sales (0730)
• UK Q1 Final GDP (0830)
• UK Q1 Current Account (0830)
• Switzerland KOF Swiss Leading Indicator (0930)
• Germany Jun. CPI - Bavaria (1000)
• Canada May Industrial Product Price and Raw Materials Price Index (1230)
• US May Personal Income and Spending (1230)
• US May PCE Deflator and PCE Core (1230)
• US Jun. Final University of Michigan Confidence (1400)

Market Comments

The stock market swoon yesterday finally saw the classic risk aversion response in FX as CHF and JPY crosses took a dive. This comes just a day after we make a joke about FX traders becoming commodity traders (currencies having done everything in their power lately to ignore the stock market sell-off and the low yielders trading inversely and in lockstep with commodities and interest rates). Key for yesterday's development was not only the action in equities, but mostly the massive fall in government bond yields. Then, overnight, the weak data from Japan was actually ugly enough to cause a bit of consolidation in the JPY move. Household spending was down over 3% year-on-year in May and the June inflation data for Tokyo is showing signs of more rapidly rising prices. Japan is very dependent on many raw materials imports and the JPY will likely need for the commodity bull to show signs of ending before showing a sustainable rise. Still, the economic malaise is definitely showing signs of spreading and deepening and this is a background bullish story for the JPY - the key in the medium term will be signs of slowdown in various key emerging market economies to make the story complete. If we look at the JPY crosses, we saw a reasonable dip yesterday, but big support levels are far from violated, so the market may require continued pressure on asset markets for a strong JPY story to progress in the short term.

The USD continues to suffer as it responded poorly in a risk averse environment (our eventual expectation is that signs of slowing global growth are actually a USD bullish story, but for now, the market still seems focused on the Fed's wan rhetoric and lack of credibility on the inflation-fighting front.)

One of the reasons for yesterday's equity sell-off was a Goldman Sachs downgrade of investment banks and GM stock. There has also been a lot of noise lately about the British banks, yet GBP has held up remarkably well with the focus on inflation rhetoric from the BOE yesterday. It is amazing how this market tenaciously holds on to the interest rate differential argument for price discovery. The UK economy is headed for a crash - higher rates will only make a bigger noise. Nevertheless, GBPUSD is now free of all short term resistance with the move above 1.9850 yesterday. We wonder if perhaps the GBP strength is mostly based on a short squeeze rather than new positions - how long will this continue? The 200-day moving average in GBPUSD comes in just under the 2.0000 level.

Yesterday's US data did little to inspire any confidence in the US economy. Weekly jobless claims remain high and raise worries about next week's US employment report. Existing home sales were marginally higher than expected and higher than in April, though the less than bullish reason for the uptick, according to reports, was increased interest from bargain hunters with so many houses on the auction block due to foreclosures.

It will be interesting to see how equity and bond markets finish the week after a very depressing week indeed on the exchanges. And how will FX respond? Next week offers plenty of data from the USD in a holiday-shortened week with the ISMs and employment reports the key highlights. The ECB meeting next Thursday is the key non-US event risk.

Chart: EURCHF
The market's classic risk barometer took a hit yesterday as government bonds finally made a stand and global stock markets swooned. EURCHF posted a brief new high very close to the key 200-day moving average, only to fall steeply for most of the rest of the day. This may the long awaited signal that it is time to sell EURCHF on the global growth slowdown and potential for risk aversion. The key follow up for this scenario would be a move below the 1.6030 area support level.