Yesterday saw the USD teasing the market with a further show of strength, but key resistance levels held as the market plunged back into recent trading ranges. The low volatility environment can only hold for so long – particularly given the geopolitical and potential policy trajectories of the coming weeks and months. What’s the lay of the land?
UK Trade Balance and Inflation
The UK Trade Balance contracted violently from a record -£9686M in Dec. to a “mere” -£7057M in January. The improvement came partially as a result of weather keeping export shipments bottled up in December and heavy aircraft imports ahead of the New Year due to a tax change scheduled to take place at the beginning of 2011. But that was not the entire explanation, and there was a sharp rise in exports relative to imports for January, a development that needs to deepen in the months and years ahead as the UK will one day need to either rekindle its financial sector to encourage capital flows into the country like in the days of old when EURGBP traded at 0.65 and GBPUSD at above 2.00 or it will need to see its currency weaken until the terms of trade picture balances out. For more coverage on the UK Trade Balance picture, see this excellent FT article. In other news, the BRC shop price index for February showed the fast rise in prices since late 2008, a development clearly driven by fuel prices.
The UK Trade Balance contracted violently from a record -£9686M in Dec. to a “mere” -£7057M in January. The improvement came partially as a result of weather keeping export shipments bottled up in December and heavy aircraft imports ahead of the New Year due to a tax change scheduled to take place at the beginning of 2011. But that was not the entire explanation, and there was a sharp rise in exports relative to imports for January, a development that needs to deepen in the months and years ahead as the UK will one day need to either rekindle its financial sector to encourage capital flows into the country like in the days of old when EURGBP traded at 0.65 and GBPUSD at above 2.00 or it will need to see its currency weaken until the terms of trade picture balances out. For more coverage on the UK Trade Balance picture, see this excellent FT article. In other news, the BRC shop price index for February showed the fast rise in prices since late 2008, a development clearly driven by fuel prices.
Chart: USDCAD
USDCAD has pushed to a new low today since late 2007 on no particularly compelling development. The rate spreads have been drifting in favor of CAD again lately and oil prices and risk have bounced over the last 24 hours. It will take a bit of risk aversion and/or severe decline in oil prices or a round of belly-aching from Carney and company to derail the downtrend, it appears.Let's see how the pair finishes the day, though.
USDCAD has pushed to a new low today since late 2007 on no particularly compelling development. The rate spreads have been drifting in favor of CAD again lately and oil prices and risk have bounced over the last 24 hours. It will take a bit of risk aversion and/or severe decline in oil prices or a round of belly-aching from Carney and company to derail the downtrend, it appears.Let's see how the pair finishes the day, though.
Looking ahead
It’s more than tough to draw a bead on the market’s thinking here – the interest rate spreads have hardly budged in recent days, which to some degree explains the inability of most FX pairs to find a sustained direction. The churning equity market offers no hint of directionality, either, though it does appear that the larger ranges suggest much higher potential for volatile behavior than was the case at almost any time during the amazing rally from last September until about three weeks ago.
It’s more than tough to draw a bead on the market’s thinking here – the interest rate spreads have hardly budged in recent days, which to some degree explains the inability of most FX pairs to find a sustained direction. The churning equity market offers no hint of directionality, either, though it does appear that the larger ranges suggest much higher potential for volatile behavior than was the case at almost any time during the amazing rally from last September until about three weeks ago.
But what will be catalyst here? A renewed oil spike combined with an equity market sell-off? Only two things are clear at present: the status of QE2 is very well known and the expected end of said program in late June is likely already beginning to affect risk markets now – which are more likely to trade sideways at best if nothing new comes to the table on the uncertainty of how well the economy and markets can do without this stimulus program. It is hints of QE3+ that will be the driver for the USD and for risk from here on out (with geopolitics as a sideshow that can still move things dramatically either way at times, though further Middle East unrest is less USD bearish than the market probably thinks for a number of reasons – main one being US oil suppliers are extremely diversified around the globe). Consensus suggests that we see an end to QE2, but that markets won’t be able to take it, and that this will usher in QE3 after a brief pause. The other thing that is overwhelmingly clear is that the Euro is headed for a key test in coming weeks with the EU summit and with mounting questions on the next step for the PIGS, all while the ECB appears to be ready to tighten the interest rate noose, possibly beginning already at the next ECB meeting . Debt spreads are suggesting that worries are ratcheting higher here, providing a persistent threat to the EURUSD rally of late. For the shortest term, watch the 1.3860/1.3800 area for signs that a larger correction may be underway.
It’s time for the RBNZ Cash Target announcement, which is up shortly after the close in trading in NY this evening. The NZD has gotten very cheap here as the market is looking for a rate cut to deal with the after-effects of the devastating Christchurch earthquake. Let’s remember that this country is a huge food exporter and food prices are still very elevated and the earthquake hasn’t done any damage to that sector of the economy. Any further spike of weakness in NZD, even if the RBNZ cuts 50 bps (we suspect better than 50/50 odds on that), may prove of short duration. The most interesting trades in NZD may be against pro-cyclical currencies like AUD, where the action went near-ballistic recently before correcting somewhat in recent days.
Look out for the Australia employment report in the Asian session tonight. The unemployment rate has recently fallen to the lowest levels since the beginning of 2009 (and never got particularly worrisome in the first place), but the last couple of months of payrolls data has shown. Our general impression of Aussie data suggests little to no momentum outside of the mining sector and one has to wonder whether the floods are still affecting the likes of employment data as well.
Economic Data Highlights
- Australia Mar. Westpac Consumer Confidence out at 104.1 vs. 106.6 in Feb.
- Japan Jan. Machine Orders outa t +3.0% MoM and +5.1% YoY vs. +4.2%/+5.9% expected, respectively and vs. -1.6% YoY in Dec.
- UK Feb. BRC Shop Price Index rose +2.7% YoY vs. +2.5% in Jan.
- Australia Jan. Home Loans fell -4.5% MoM vs. -1.0% expected and +2.1% in Dec.
- Switzerland Feb. CPI out at +0.4% MoM and +0.5% YoY vs. +0.3%/+0.4% expected, respectively, and vs. +0.3% YoY YoY in Jan.
- Sweden Jan. Industrial Production out at +4.1% MoM and +15.0% YoY vs. +0.8%/+9.9% expected, respectively and vs.+10.0% YoY in Dec.
- Sweden Jan. Industrial Orders out at -1.6% MoM and +12.1% YoY vs. +14.1% YoY in Dec.
- UK Jan. Visible Trade Balance out at -£7057M vs. -£8500M expected and -£9686M in Dec.
- Germany Jan. Industrial Production rose +1.8%/+12.5% YoY vs. +1.7%/+11.1% expected, respectively and vs. +11.3% in Dec.
- Canada Jan. New House Price Index rose +0.2% MoM and +1.9% YoY vs. +0.1%/+1.9% expected, respectively and vs. +2.1% YoY in Dec.
Upcoming Economic Data Highlights
- US Jan. Wholesale Inventories (1530)
- US Weekly DoE Crude Oil and Product Inventories (1530)
- New Zealand RBNZ Official Cash Target (2000)
- Japan Feb. Domestic CGPI (2350)
- Australia Feb. Employment Change and Unemployment Rate (0030)
- China Feb. Trade Balance (0200)
- Japan Feb. Machine Tools Orders (0600)
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