UK CPI batters sterling as risk sees appetite on back of POMOs & US IP

Again, from my previous post:

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Yesterday I mentioned that the relative empty summer week could give these battered markets a small lift. One relevant event I failed to mention was the POMO scheduled today for a variety of Treasury securities, with maturities ranging from 2014-2016, which provided the catalyst and funding for the risk chase today. The US July IP number doubling expectations, coming in at 1.0%, also provided a lift.

The Fed is back to its stealth monetization, as recently-issued debt were picked up in the POMO by the NYFRB. The process of banks buying excess Treasuries and repo-ing them back to the Fed via POMO for a risk-free spread is back with QE Lite/1.5. The 30yr found significant demand on the front-run-the-Fed trade, as the Federal Reserve announced that long bond purchases would be indeed a part of the POMOs. Implications of the 30yr’s newfound demand is significant to the 2s10s30s butterfly, which is closely tracking the USD/JPY in an inverse fashion.

SPY broke its 55d today and finished up 1.23%, after giving back about half of its intraday gains in the afternoon part of the trading session. Volume was about average and the 21d & 200d MA’s are looming right above as overhead resistance. Unless this rally picks up some legs to drive it through those key averages, the equity market and risk in general may be gearing for the next wave of this fresh downtrend. A breakdown in the USD/JPY could be just the trigger. The S&P currently remains in breakdown territory from its rising wedge, but is showing conflicting signals as it bounces off channel support. A break through the 200d should send it restesting this month’s highs and give a run toward the potential inverse head & shoulders development (neckline SPY 114), while a break through the channel support trendline should send it down to retest June lows and possibly breakdown through the SPY 102 neckline of the market’s massive yearlong head & shoulders pattern.

EURUSD had a trendless, choppy down day today, giving back 30ish pips from yesterday’s gains, as the Dollar Index found some footing at its 21d. I still think it can make a short-term run to the 1.30 handle, but it needs to take out overhead resistance around 1.29 to do so. For now, the short-term bounce picture looks most likely, but a break below 1.273 should confirm a resumption of the downtrend. I am holding the short.

USDJPY sold off about 20 pips in another down day that brings the cross ever-closer to the magical 84.75 level. With no BoJ interventionalist talk in the most recent opportunity, and US yields continually plunging, this cross is at big risk of a big move down, ceteris paribus. I will be shorting on either a bounce to its 21d or 55d, or on breakdown through 87.45.

The EURJPY cross seems to be forming an important pivot zone between 109 and 111. Whether this resolves as a bear flag or a pivot base is yet to be seen, but those two S/R levels should be closely watched. The pivot zone is within a larger ascending triangle, defined by July highs resistance around 115 and the trendline connecting July & August cycle lows. A breakout not only is bullish for the euro/eurozone, it is indicative of risk appetite as a whole, and could translate in strength in other risk markets. Meanwhile, a breakdown should send it back to July lows and most likely beyond, which would be terrible for risk, as the euro plunges and yen surges. EURJPY is going to be a very important risk metric cross going forward. The next major support in the event of a breakdown is around 111, and beyond that, 90, from 2001 & 2000, respectively. I will most likely be triggering a short position on a breakdown through 109.

Copper is showing a very interesting development, as it threatens breakout through its five-month-long symmetrical triangle. After a sharp selloff in the spring, copper found support at its 38.2% Fibo level and then again at its 200d and is now seemingly poised for breakout. A breakout in copper would be bullish for risk in general, especially for AUD crosses, and would most likely bring the decoupling thesis back into trading vogue. However, overhead resistance at 3.70 could be it for copper. Of course, there is also a possibility for a failure at this trendline resistance and subsequent breakdown through the triangle’s support trendline. This would be disastrous for risk.

Sterling was the weakest of all the major currencies today, as July UK CPI grew at 2.6%, at its lowest rate since July 2009. Sterling sold off 55 pips and is now resting right at its 200d. A breakdown through 1.545-1.550 could usher in much more selling in this cross, as its Fibo level at 1.60 will probably hold as at least an intermediate-term high. Wednesday’s BoE minutes release could trigger much further selling if Sentence’s hawkish sentiments are somewhat reversed. Sterling has outperformed other majors recently because of its above-target inflation readings permitting GBP to be the only major currency with near-term rate hike potential. The plunge in CPI could change that possibility and lead to a sharp reversal in sterling, into an already fragile market. I’m short GBPUSD from 1.5985 and definitely holding it.

Potash Corp of Saskatchewan (POT) rejected a $39b bid from miner BHP Billiton (BHP), calling the offer “grossly inadequate”. POT shares rose 27%, through the $130 offer pps, to settle around $143. With wheat prices surging and a unanimous rejection of the BHP bid by the Potash board, the buyout premium may increase in the near future, sending POT and other fert and ag issues surging further. This is bullish for CAD, as Potash is one of the largest Canadian companies and is the largest fertilizer corporation in the world, fertilizer being one of Canada’s largest exports. With sterling finding recent weakness and CAD seeing near-term bullish signals from the ags department, GBPCAD could find some near-term selling, as it breaks below its 200d and through its rising wedge after finding resistance at its 38.2% Fibo retracement from its July 2009 peak. I went short on the MA breakdown.