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Flash: Even the Gods have bad hair days - Societe Generale

FXstreet.com (Barcelona) - Kit Juckes, Global Head of Currency Strategy at Societe Generale notes that yesterday morning it looked as though the market gods had laid out the pieces on a chessboard, in a way that was logical and tidy.

He feels that now they have thrown them in the air to land where they please. He writes, “Welcome to a much weaker Nikkei, the prospect of risk aversion into month-end, accompanied by spread widening, lower yields and bizarrely a slightly softer dollar.”

The overnight news is: 50bp hike in Brazil, where 25bp was expected. A strong (9.1% m/m) increase in Australian building approvals, a solid (1.1% y/y) gain in UK house prices, more selling (Y1.1trn) of foreign bonds by Japanese investors last week. Further, he adds, “Ahead we get Eurozone business and economic confidence data, an Italian auction, US claims, pending home sales and a revision (up) in GDP. Not a heavy calendar. By far the most e-mailed news story meanwhile was a piece on the diminishing returns from credit growth in China. Lend a lot, get little growth back, watch debt snowball. Wei Yao has written on this. Europe doesn't have this problem. No credit growth, no economic growth - simples! As they say...”

Looking East he notes that the Nikkei has wiped out May's gains and unless USD/JPY collapses a couple more percentage points, he believes that we are still in for an unprecedented 8th consecutive month/month gain, but yesterday's price action in yen and Swiss franc was ugly (for a bear of both), and the Japanese sales of foreign bonds are persistent enough to force head-scratching now...He continues by adding, “My core view - that re-calibration of Treasury yields leads to dollar strength, EM and commodity weakness, and a much bumpier June/August period for risk assets - isn't altered.” However, he notes that it's clear that bumpiness will be felt everywhere. Since 10yr note yields fell yesterday long before the Nikkei opened, he can't help suspecting they'll get more help this morning. He believes that an upward revision to GDP won't be enough to swing us the other way, writing, “ It's a bearish market but not a smooth one.”

All in all, he feels that this in turn leaves FX messy, after some huge moves. He writes, “Long USD/CHF, long USD/JPY, long GBP/CHF are all fine, just not today!” He believes that the euro, as ever, is in a range. The Italian auction won't hurt the euro, the rates strat team think demand will be solid, like 5s and like 5-10 steepeners. Further, he suggests that Eco-gloom isn't 'news' and the EC surveys are probably 'less negative'. He finishes by writing, “Month-end wrapping-up probably dominates. Month-end battening-down of hatches is likely as risk exposures are reduced in a hurry. This is almost your last chance to sell in May and even the persistently (and rightly) credit-bullish Suki Mann has been stunned by the resilience of the corporate bond market in recent days....”

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