GBPUSD dipped tentatively below 1.6000 today despite already very steep losses late last week. EURUSD has traded only marginally lower as the critical 1.4000 level looms. A break of that support offers better technical support for the bearish case. Will the Euro bears get what they want this week?
Merkel and Sarkozy suffer in the polls
Local elections in both Germany and France saw the parties of those two leaders suffering resounding defeats – Merkel in the large German state of Baden-Wuerttemburg, traditionally a CDU stronghold, and Sarkozy’s party lost out heavily to the opposition Socialists in local elections.
Local elections in both Germany and France saw the parties of those two leaders suffering resounding defeats – Merkel in the large German state of Baden-Wuerttemburg, traditionally a CDU stronghold, and Sarkozy’s party lost out heavily to the opposition Socialists in local elections.
In Baden-Wuerttemberg, Greens gained strongly and will lead the state government there, kicking the CDU out for the first time in 58 years. Meanwhile, Merkel is getting stretched rather thin in trying to placate her constituents on the one hand, while working to save the EuroZone on the other, as she moved to reduce the German contribution to the post mid-2013 ESM bailout mechanism by more than 50%.
In France, the local “elections” are for representation at local councils and are more of a political poll than a real election, though they are important for gauging voter temperature ahead of the presidential race in April of next year. According to an FT article, the right-leaning National Front would receive more votes if elections were held today than Sarkozy’s UMP party.
In other EU news, Reuters reported today that the ECB is working on a new liquidity facility aimed at supporting banks for a longer period of time relative to the current ELA mechanism that has received so much attention in connection with Irish banks.
In other EU news, Reuters reported today that the ECB is working on a new liquidity facility aimed at supporting banks for a longer period of time relative to the current ELA mechanism that has received so much attention in connection with Irish banks.
Chart: EURUSD
EURUSD is trading just above the 1.40 level his morning as the market. Fed rate expectations are sharply higher on the day, while events over the weekend are seeing gathering clouds over the Euro. Will the market lean toward Euro weakness, or is the remarkably strong risk appetite in this environment going to prevent any further greenback rally? A break and close below the 1.40 level would weaken the up-trend at minimum and cause significant damage to the bullish case.
EURUSD is trading just above the 1.40 level his morning as the market. Fed rate expectations are sharply higher on the day, while events over the weekend are seeing gathering clouds over the Euro. Will the market lean toward Euro weakness, or is the remarkably strong risk appetite in this environment going to prevent any further greenback rally? A break and close below the 1.40 level would weaken the up-trend at minimum and cause significant damage to the bullish case.
More Fed Hawks?
After the Fed’s Plosser on Friday outlined his desired trajectory for a Fed exit strategy that involved both rate hikes and a contraction of the Fed’s balance sheet, the St. Louis Fed’s Bullard was out this weekend arguing for an early exit from QE2. This was the same Bullard who is supposedly rather influential within the Fed and was the purported mastermind of QE2 in the first place. His previous main rhetorical push was for a “tapering” of the . Other Fed officials, even those more or less opposed to QE2, have suggested that QE2 will run to completion, so this is surprising to say the least, and Fed rate expectations eased even lower today after a sizable drop on Friday. Of course, almost all recent hawkish comments from the Fed concerning QE have been made based on the belief that the US economy is doing well. The more interesting going forward is whether the US economy can stand on its own two feet without QE.
After the Fed’s Plosser on Friday outlined his desired trajectory for a Fed exit strategy that involved both rate hikes and a contraction of the Fed’s balance sheet, the St. Louis Fed’s Bullard was out this weekend arguing for an early exit from QE2. This was the same Bullard who is supposedly rather influential within the Fed and was the purported mastermind of QE2 in the first place. His previous main rhetorical push was for a “tapering” of the . Other Fed officials, even those more or less opposed to QE2, have suggested that QE2 will run to completion, so this is surprising to say the least, and Fed rate expectations eased even lower today after a sizable drop on Friday. Of course, almost all recent hawkish comments from the Fed concerning QE have been made based on the belief that the US economy is doing well. The more interesting going forward is whether the US economy can stand on its own two feet without QE.
Chart: GBPUSD
While a couple of Fed officials are making hawkish noises, we had the BoE’s Posen (the known dove who continues to vote for further expansion of asset purchases) out suggesting that inflation could fall to 1.5% next year in the UK. This did little to affect the trajectory of the UK rates today, but GBPUSD is trading below the 1.6000 area today that has served as support previously and the coming days are important. For the short term, the action looks awfully steep, but the sell-off has emphatically rejected the previous choppy uptrend for now.
While a couple of Fed officials are making hawkish noises, we had the BoE’s Posen (the known dove who continues to vote for further expansion of asset purchases) out suggesting that inflation could fall to 1.5% next year in the UK. This did little to affect the trajectory of the UK rates today, but GBPUSD is trading below the 1.6000 area today that has served as support previously and the coming days are important. For the short term, the action looks awfully steep, but the sell-off has emphatically rejected the previous choppy uptrend for now.
Looking ahead
The coming days are critical for the foreign exchange market, with the end of month/quarter/end of Japanese financial year on Thursday. In terms of Japanese equity performance versus the rest of the world – is the risk more to the side of yen strength due to the underperformance there or will the yen lose out due to the rate implications of all of the Fed jaw-boning? We could see volatile times for the market over the next five trading days.
The coming days are critical for the foreign exchange market, with the end of month/quarter/end of Japanese financial year on Thursday. In terms of Japanese equity performance versus the rest of the world – is the risk more to the side of yen strength due to the underperformance there or will the yen lose out due to the rate implications of all of the Fed jaw-boning? We could see volatile times for the market over the next five trading days.
Certainly also this week is a key test for whether rate differentials count more than risk appetite in determining the relative value of currencies at the moment. We’ve had a powerful round of rhetoric from a number of sources within the Fed that is supportive of the USD from a rate spread perspective, but the market has historically shown an aversion to buying the greenback when risk appetite is healthy. Which development is more important? And while on the subject of risk appetite, AUD and CAD are going great guns at the moment on risk appetite while the very largest currencies all look weak in comparison.
Elsewhere, the Middle East situation remains an important source of catalysts for the energy market and the Japanese nuclear situation has not been sufficiently resolved to put behind us for now, either.
Elsewhere, the Middle East situation remains an important source of catalysts for the energy market and the Japanese nuclear situation has not been sufficiently resolved to put behind us for now, either.
Watch out for the Fed’s Lockhart and Evans out speaking later today. Evans is a known dove.
Buckle up, this could be an interesting week for foreign exchange.
Economic Data Highlights
- Sweden Feb. Retail Sales out at 0.0% MoM and +3.0% YoY vs. +0.4%/+4.3% expected, respectively and vs.+2.4% YoY in An.
- Sweden Feb. Trade Balance out at +12.0B vs. +9.0B expected and +7.7B in Jan.
- US Feb. Personal Income rose +0.3% MoM vs. +0.4% expected
- US Feb. Personal Spending rose +0.7% MoM vs. +0.5% expected
- US Feb. PCE Core out at +0.2% MoM and +0.9% YoY as expected and vs. +0.8% YoY in Jan.
Upcoming Economic Calendar Highlights
- US Feb. Pending Home Sales (1400)
- US Mar. Dallas Fed Manufacturing Activity (1430)
- US Fed’s Lockhart to speak (1640)
- US Fed’s Evanst to speak (1940)
- New Zealand Feb. Trade Balance (2145)
- Australia RBA’s Edey to Speak (2200)
- US Fed’s Rosengren to Speak (2200)
- Japan Feb. Jobless Rate (2330)
- Japan Feb. Overall Household Spending (2330)
- Japan Feb. Retail Trade (2350)
- Japan Mar. Small Business Confidence (0500)
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