$$USDJPY Tumbles after Poor US Retail Sales, PPI Data

13 June 2012 13:10 GMT THE TAKEAWAY: US Advance Retail Sales (MAY) > -0.2% m/m from -0.2% m/m > JPY, GOLD BULLISH
THE TAKEAWAY: US Produce Price Index (MAY) > 0.7% y/y from 1.9%m/m > JPY, GOLD BULLISH
The rally by high beta and risk-correlated assets stalled in their pre-market rally following the disappointing Advance Retail Sales report and Produce Price Index for May released on Wednesday. The reports, released at 12:30 GMT, painted two distinct pictures with the same conclusion: the US economy is weakening. The first report showed that sales contracted by 0.2 percent last month, after contracting by a revised 0.2 percent in April. A large part of this decline can be attributed to falling gasoline prices, with a 2.2 percent decline coming in gasoline station sales. When discounting autos, then autos and gasoline, sales still contracted by 0.4 percent and 0.1 percent, respectively.
The weakness in oil prices wasn’t only evident in the Advance Retail Sales report for May, however. The Producer Price Index for May showed that prices contracted by 1.0 percent on a monthly-basis after contracting by 0.2 percent in April. According to a Bloomberg News survey, m/m PPI was expected to decline by 0.6 percent. On a yearly-basis, prices inflated by 0.7 percent from 1.9 percent in April, below the 1.2 percent forecast. Excluding food and energy prices (for the so-called “core” reading), prices were sticky; however, coming it at 2.7 percent y/y in line with the prior month’s reading.
USDJPY 1-minute Chart: June 13, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio
Following the release, the USDJPY took a dive lower from 79.64 to 79.40, at the time this report was written. Considering the pair’s range for the past few hours – trading between 79.60 and 79.73 – the move lower was clearly a sign that market participants have put a greater weighting in the QE trade. To confirm this, one needs to look no further than Gold, which rallied from $1611.88/oz to as high as $1623.60/oz. The commodity currencies were lower as well, with the AUDJPY dropping from 79.39 to 79.13, at the time this report was written.

: Euro Tumbles on Egan Jones Spain Downgrade; Correlations Favor Losses

The Euro fell to fresh multi-year lows as Egan Jones downgraded Spain’s sovereign debt rating yet again, and cross-market correlations suggest the EURUSD could continue falling on a surge in Spanish bond yields. The short-term link between Spanish 10-Year Government Bond Yields and the Euro/US Dollar trades near record strength.
During the heights of the global financial crisis in 2008, it was popular to call many large banks and financial institutions “too big to fail”. Given that Spain’s economy is nearly 5 times the size of Greece, we think it’s “too big to bail out”.
Further Euro Zone debt struggles are all but guaranteed, and the Spanish fiscal crisis could force further EURUSD losses.
Forex Correlations Summary
View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.
Correlation between Euro/US Dollar Exchange rate and Spanish Bond Yields

GLD	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.80	0.75	-0.53	0.65	-0.34	0.72	-0.77
1 Month	0.57	0.04	-0.56	0.39	0.03	0.44	-0.66
3 Month	0.56	0.25	-0.31	0.50	-0.18	0.49	-0.61
1 Year	0.19	0.17	-0.20	0.25	-0.17	0.24	-0.28
USO	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.83	0.83	-0.30	0.79	-0.59	0.84	-0.79
1 Month	0.40	0.18	0.14	0.59	-0.53	0.70	-0.43
3 Month	0.43	0.40	0.08	0.70	-0.63	0.69	-0.50
1 Year	0.48	0.37	0.00	0.64	-0.63	0.59	-0.53
DIA	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.21	0.20	0.01	0.23	-0.42	0.21	-0.19
1 Month	0.21	0.25	0.51	0.46	-0.69	0.52	-0.15
3 Month	0.38	0.44	0.37	0.61	-0.71	0.57	-0.36
1 Year	0.64	0.55	-0.05	0.80	-0.82	0.76	-0.69
FTSE100	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.03	0.18	0.87	0.06	-0.23	-0.01	0.20
1 Month	0.17	0.11	0.64	0.25	-0.58	0.30	0.06
3 Month	0.37	0.35	0.37	0.56	-0.67	0.52	-0.31
1 Year	0.46	0.37	0.01	0.69	-0.67	0.65	-0.55
SLV	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.66	0.72	-0.03	0.65	-0.34	0.73	-0.59
1 Month	0.47	0.03	-0.48	0.25	-0.01	0.41	-0.53
3 Month	0.53	0.33	-0.20	0.60	-0.39	0.61	-0.61
1 Year	0.33	0.27	-0.16	0.39	-0.36	0.39	-0.40
Perfect Positive Correlation:				1.00
Perfect Negative Correlation:				-1.00

Euro/US Dollar Exchange Rate (lhs)


Inverse of the Spanish Government 10-Year Bond Yield (rhs)
The Euro has tumbled to its lowest levels against the US Dollar (ticker: USDOLLAR) since 2010 as investors flee the risk-sensitive EUR in favor of the safe-haven US currency. We saw the Euro fall to fresh lows as ratings agency Egan Jones downgraded Spanish debt and left outlook on future ratings ‘negative’.
Spanish bond yields have surged near their highest levels in decades—a clear sign that investors increasingly price in the risk of default or at the very least great funding difficulty. Bond yields move inversely to price, so a sell-off in Spanish bonds would lead to higher borrowing costs for the Spanish government.
Given that Spain is the fourth-largest economy in the Euro Zone, it remains critical to watch whether the Spanish government is able to meet deficit and debt financing needs. That said, we see no easy resolution to this crisis in confidence, and further drops in Spanish bond prices/rise in yields could push the Euro to further lows.

@ Crude Oil Tumbles Could Force US Dollar to Surge vs. Canadian Dollar

Sharp losses in Crude Oil prices have sent the US Dollar (ticker: USDOLLAR) higher against the Canadian Dollar, and further losses would favor USDCAD gains.
Commodities such as Crude Oil, Gold, and Silver have sold off sharply amidst clear tensions across financial markets—sending the US Dollar higher. This effect is particularly pronounced against commodity-sensitive currencies such as the Canadian Dollar, Australian Dollar, and New Zealand Dollar.
The short-term correlation between Crude oil prices and the Canadian Dollar trades near record strength, and further Crude Oil weakness would likely result in USDCAD gains. The NYMEX contract trades dangerously close to year-to-date lows near the $95.44. A substantial break lower could force the USDCAD to trade above critical resistance at C$1.0050.
Forex Correlations Summary
View forex correlations to the SPDR Gold ETF Trust (GLD), United States Oil Fund ETF (USO), SPDR Dow Jones Industrial Average ETF Trust (DIA), UK FTSE 100 Index, and IShares Silver Trust ETF (SLV) prices.

GLD	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.55	-0.14	-0.61	-0.14	0.46	0.62	0.17
1 Month	0.41	0.24	-0.45	0.43	-0.09	0.51	-0.56
3 Month	0.47	0.20	-0.20	0.41	-0.18	0.40	-0.48
1 Year	0.18	0.16	-0.18	0.24	-0.17	0.24	-0.27
USO	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.32	0.11	0.80	0.13	-0.69	0.42	0.06
1 Month	0.53	0.31	0.22	0.57	-0.61	0.63	-0.45
3 Month	0.40	0.35	0.19	0.53	-0.53	0.56	-0.39
1 Year	0.47	0.36	-0.01	0.63	-0.62	0.58	-0.52
DIA	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.48	0.09	0.91	0.06	-0.74	0.20	0.09
1 Month	0.57	0.41	0.34	0.66	-0.77	0.59	-0.49
3 Month	0.44	0.44	0.30	0.61	-0.69	0.55	-0.40
1 Year	0.65	0.55	-0.07	0.80	-0.82	0.75	-0.69
FTSE100	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.86	0.22	0.90	-0.15	-0.73	-0.01	0.05
1 Month	0.64	0.45	0.49	0.57	-0.75	0.57	-0.42
3 Month	0.47	0.40	0.25	0.62	-0.71	0.59	-0.42
1 Year	0.47	0.38	-0.03	0.70	-0.67	0.65	-0.56
SLV	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.34	-0.25	-0.45	-0.39	0.42	0.56	0.40
1 Month	0.58	0.45	-0.07	0.56	-0.35	0.59	-0.60
3 Month	0.54	0.35	-0.12	0.57	-0.44	0.57	-0.57
1 Year	0.33	0.26	-0.14	0.39	-0.37	0.38	-0.39
Perfect Positive Correlation:				1.00
Perfect Negative Correlation:				-1.00

GLD	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.55	-0.14	-0.61	-0.14	0.46	0.62	0.17
1 Month	0.41	0.24	-0.45	0.43	-0.09	0.51	-0.56
3 Month	0.47	0.20	-0.20	0.41	-0.18	0.40	-0.48
1 Year	0.18	0.16	-0.18	0.24	-0.17	0.24	-0.27
USO	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.32	0.11	0.80	0.13	-0.69	0.42	0.06
1 Month	0.53	0.31	0.22	0.57	-0.61	0.63	-0.45
3 Month	0.40	0.35	0.19	0.53	-0.53	0.56	-0.39
1 Year	0.47	0.36	-0.01	0.63	-0.62	0.58	-0.52
DIA	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.48	0.09	0.91	0.06	-0.74	0.20	0.09
1 Month	0.57	0.41	0.34	0.66	-0.77	0.59	-0.49
3 Month	0.44	0.44	0.30	0.61	-0.69	0.55	-0.40
1 Year	0.65	0.55	-0.07	0.80	-0.82	0.75	-0.69
FTSE100	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	0.86	0.22	0.90	-0.15	-0.73	-0.01	0.05
1 Month	0.64	0.45	0.49	0.57	-0.75	0.57	-0.42
3 Month	0.47	0.40	0.25	0.62	-0.71	0.59	-0.42
1 Year	0.47	0.38	-0.03	0.70	-0.67	0.65	-0.56
SLV	EURUSD	GBPUSD	USDJPY	AUDUSD	USDCAD	NZDUSD	USDOLLAR
1 Week	-0.34	-0.25	-0.45	-0.39	0.42	0.56	0.40
1 Month	0.58	0.45	-0.07	0.56	-0.35	0.59	-0.60
3 Month	0.54	0.35	-0.12	0.57	-0.44	0.57	-0.57
1 Year	0.33	0.26	-0.14	0.39	-0.37	0.38	-0.39
Perfect Positive Correlation:				1.00
Perfect Negative Correlation:				-1.00

US Dollar/Canadian Dollar Exchange Rate (lhs)
NYMEX West Texas Intermediate Crude Oil (rhs)
Correlation between US Dollar/Canadian Dollar Exchange Rate and Crude Oil Prices
The US Dollar (ticker: USDOLLAR) remains strongly correlated to oil prices, and that link is especially strong between the USD/Canadian Dollar exchange rate and the NYMEX WTI Crude Oil Contract. The Canadian Dollar sold off sharply (USDCAD rallied) as oil prices saw their biggest single-week decline since September, 2011.
If we go back to similar moves in 2011, we saw the USDCAD rally from C$0.9800 to highs of C$1.0660 in mere weeks. But the NYMEX Crude Oil contract fell from $90 to $75 in that same stretch—good for a 17% decline. A similar peak-to-trough move would put the front-month contract at $88; it traded at $96.50 at time of writing.
Could another $8.50 decline in Crude Oil prices be enough to push the USDCAD to $1.0660? History says it should be. Yet Canadian Dollar positioning shows a surge in speculative USDCAD short positions. In other words—many people are positioned for weakness and would not likely let the USDCAD break higher without a fight.