- US weekly jobless claims rise 25,00 to 584,000; continuing claims fall 50,000. Seasonal distortions largely over
- Spanish terrorist group ETA blamed for car-bombings which kill two
- IMF says EUR overvalued by up to 15%, ECB should cut rates; Europe must clean up banking sector
- Bank of England completes GBP 125 Gilt buying program; to review at August MPC meeting
- US auctions $28 bln in 7-year notes, best sale of the week
- Canadian PM Harper: Economic recovery fragile
- S&P 500 rises 1.1% but slumps about 1% from highs in last 30 minutes of trade.
- US 10 year notes fall 9 bp in yield to 3.63% after 7-yr auction.
Most aspects of the reflation trade reversed yesterday’s losses as China soothed fragile nerves overnight, saying they will maintain an easy monetary policy. Upbeat earnings reports in the US and a fairly robust jobless claims report (claims held below 600,000 as seasonal distortions waned) combined with the Chinese news to light a fire under stocks and commodities.
Bond yields rose as well, early in the session, helping underpin USD/JPY and JPY crosses. USD/JPY exploded through 95.50 and ran as high as 95.88 before stalling. Investment flows into US assets from Japan plus a rise in risk appetites were the near-term catalysts. Options-players were caught flat-footed on the move higher and had to rush into hedge, traders said. A well-received 7-year note auction took the steam of of the USD/JPY rally as bond yields fell amid a rally in bond prices.USD/JPY slumped back to the 95.40s late in the session as the lower yields and some profit-taking on Wall St prompted dealers to mark prices lower.
EUR/USD was whipsawed during the US morning by a proverbial “tape bomb”. Prices were rebounding within the overnight range, trading in the low 1.4070s as Oil and stocks soared. A report from the IMF saying that the EUR is up to 15% overvalued and that the ECB has room to cut rates and should do so soon knocked the single currency down over a half a cent. We fell as low as 1.4015 before eventually retracing essentially the days range as the “risk” and the low odds for a further ECB rate cut was factored in by the market. New York traded 1.4015/1.4088.
GBP/USD was quite firm today, seeing strong buying against the JPY for much of the day. Japanese investment trusts were believed to be putting fresh cash to work. 1.6460/1.6523 was the NY range.
Firm commodities and firm stocks (for 7/8ths of the session) helped support the commodity currencies, lifting them from yesterday’s lows. USD/CAD slumped back to the 1.0810 area while AUD/USD reached 82.88 before easing along with stocks late in the session.
