EURUSD pulled all the way to new 2-year highs today ahead of tomorrow’s ECB meeting as the market can’t find any reason to buy the USD in this environment. The pound rebound was pounded back into place as yesterday’s positive data yielded to today’s weak production numbers. What next?
The USD poked to new lows versus the Euro, Aussie and Kiwi in today’s European session and even the JPY and CHF managed to outperform the stumbling greenback overnight as the market continues to judge that, despite a change of tune from some corners of the Fed, the US central bank remains far behind the curve on dealing with inflation (and therefore serious currency devaluation) risks and willing to allow its currency to weaken endlessly. The tenuous political situation in the US and absence of reality in the discussions amongst lawmakers on the US budget and the imminent risk of a government shutdown are perhaps also weighing on the currency. Another key component of the USD weakness is the carry trade mentality of the moment supported by raging commodity prices (new all-time high in gold yesterday, silver at new high for the cycle, corn pushing at all time highs) and buy with both hands risk appetite
GBP rally reversed?
After a positive UK Services PMI number yesterday boosted a market that appeared complacent on the short side yesterday, negative data today saw a sharp reversal of some of the gains for the pound as the industrial and manufacturing production data was much weaker than expected. Apparently, the industrial production data includes oil and gas extraction, which fell sharply, something that shouldn’t’ concern too deeply, while manufacturing production has been on a tear recently, and the rising trend remains intact despite the stagnant February data. The EURGBP cross bounced sharply, though we’ll need to see tomorrow’s dual ECB/BoE meetings and their aftermath to know the current state of affairs for that pair. In general we are still in favor of the pair finding resistance ahead of the recent 0.8855 top.
After a positive UK Services PMI number yesterday boosted a market that appeared complacent on the short side yesterday, negative data today saw a sharp reversal of some of the gains for the pound as the industrial and manufacturing production data was much weaker than expected. Apparently, the industrial production data includes oil and gas extraction, which fell sharply, something that shouldn’t’ concern too deeply, while manufacturing production has been on a tear recently, and the rising trend remains intact despite the stagnant February data. The EURGBP cross bounced sharply, though we’ll need to see tomorrow’s dual ECB/BoE meetings and their aftermath to know the current state of affairs for that pair. In general we are still in favor of the pair finding resistance ahead of the recent 0.8855 top.
Swiss CPI sees CHF decouple a bit from JPY
CHF and JPY had been trading in somewhat similar fashion lately, as EURCHF launched a hefty rally and the focus on interest rates and carry trades left many wondering why they should buy the low-yielding franc. But today’s Swiss CPI release (+0.6% headline, though there seems to be a marked seasonality in the data that isn’t removed and this time of year often sees a sharp increase in inflation) and the market action seemed to suggest that the franc is no yen, and this is certainly true from the perspective of sovereign debt pressures and the entire issue of “value” if we are to look at currencies from a devaluation pressure angle rather than an interest rate spread angle. And even on that latter account, the spreads between Euro and Switzerland have actually kept relatively stable over the last couple of weeks, even if they widened markedly since late last summer. The question going forward is, while the SNB has a long tradition of preserving value in the nation’s currency, they may wish to balance valuation consideration versus the Euro versus the need to preserve purchasing power domestically.
CHF and JPY had been trading in somewhat similar fashion lately, as EURCHF launched a hefty rally and the focus on interest rates and carry trades left many wondering why they should buy the low-yielding franc. But today’s Swiss CPI release (+0.6% headline, though there seems to be a marked seasonality in the data that isn’t removed and this time of year often sees a sharp increase in inflation) and the market action seemed to suggest that the franc is no yen, and this is certainly true from the perspective of sovereign debt pressures and the entire issue of “value” if we are to look at currencies from a devaluation pressure angle rather than an interest rate spread angle. And even on that latter account, the spreads between Euro and Switzerland have actually kept relatively stable over the last couple of weeks, even if they widened markedly since late last summer. The question going forward is, while the SNB has a long tradition of preserving value in the nation’s currency, they may wish to balance valuation consideration versus the Euro versus the need to preserve purchasing power domestically.
Chart: EURCHF
The Swiss CPI release for March saw a tremendous rally in the franc across the board, just on the heels of several days of weakness in the currency over the “guilty” conviction on its low yielding status. This comes after the EURCHF pair had been trying to take out the critical 200-day moving average and multi-month high, an area that remains the big picture resistance going forward. The next supports look like 1.30 and then the 55-day moving average a bit lower.
The Swiss CPI release for March saw a tremendous rally in the franc across the board, just on the heels of several days of weakness in the currency over the “guilty” conviction on its low yielding status. This comes after the EURCHF pair had been trying to take out the critical 200-day moving average and multi-month high, an area that remains the big picture resistance going forward. The next supports look like 1.30 and then the 55-day moving average a bit lower.
Looking ahead
Tomorrow is an important test for this market, which has really been running away with the policy tightening and runaway inflation theme, even though it’s really only the European central banks that are in a real tightening stance and they are squarely in the spotlight tomorrow. Will Trichet’s rhetoric support the 5+ hikes that are projected for the next year and will the BoE make a surprise move or hold off for another month or two (already relatively low odds for a hike tomorrow dropped sharply today after ugly UK data). If the market is able to sustain the commodity/risk rally and the Fed doesn’t come out with even sharper rhetoric in coming days, we risk a further rundown in the USD and a EURUSD move toward 1.45+ and even 1.50. If we get a surprise from Trichet and company tomorrow and the move in risk exhausts itself, it is more likely that we see a pivot in the recent market action and consolidation. We lean toward the latter, though there is little in the current picture to support that proposition, so we may have to wait until further out for such a reversal in the market action.
Tomorrow is an important test for this market, which has really been running away with the policy tightening and runaway inflation theme, even though it’s really only the European central banks that are in a real tightening stance and they are squarely in the spotlight tomorrow. Will Trichet’s rhetoric support the 5+ hikes that are projected for the next year and will the BoE make a surprise move or hold off for another month or two (already relatively low odds for a hike tomorrow dropped sharply today after ugly UK data). If the market is able to sustain the commodity/risk rally and the Fed doesn’t come out with even sharper rhetoric in coming days, we risk a further rundown in the USD and a EURUSD move toward 1.45+ and even 1.50. If we get a surprise from Trichet and company tomorrow and the move in risk exhausts itself, it is more likely that we see a pivot in the recent market action and consolidation. We lean toward the latter, though there is little in the current picture to support that proposition, so we may have to wait until further out for such a reversal in the market action.
On a side note, it seems the market is firmly of the opinion that Portugal can peel away from the Iberian peninsula and disappear into the Atlantic ocean without affecting Euro sentiment. We strongly wonder whether the complacent view on the three little PIGs is justified, and there is the risk that Trichet only barely justifies market expectations tomorrow, meaning a buy the rumor, sell the fact kind of reaction and shift in focus to sovereign debt. Still, we’d like to see more fear and loathing in Spanish and other bond spreads to see the risk of this kind of reaction come into play.
As USDCAD dips below 0.9600, watch out for the Canada Ivey PMI out shortly – last month saw a wild increase in this non-seasonally adjusted figure, so mean reversion might be a risk. Aussie traders, watch out for the employment figures out overnight, though don’t forget that BHP Billiton, metals prices, and risk appetite are firmly jostling for the Aussie’s driver’s seat as all negative numbers are written off as flood related.
Be careful out there.
Economic Data Highlights
- UK Mar. BRC Shop Price Index out at +2.4% YoY vs. +2.7% in Feb.
- Australia Feb. Home Loans out at -5.6% MoM vs. -2.0% expected
- China Mar. HSBC Services PMI out at 51.7 vs. 51.9 in Feb.
- UK Mar. Halifax House Price rose +0.1% MoM vs. +0.2 expecte dna d-0.9% in Feb.
- Switzerland Mar. CPI out at +0.6% MoM and +1.0% YoY vs. 0.0%/+0.5% expected, respectively and vs. +0.5% YoY in Feb.
- UK Feb. Industrial Production out at -1.2% MoM and +2.4% YoY vs. +0.4%/+4.3% expected, respectively and vs. +4.2% YoY in Jan.
- UK Feb. Manufacturing Production out at 0.0% MoM and +4.9% YoY vs. +0.6%/+5.8% expected, respectively and vs. +6.6% YoY in Jan.
- Germany Factory Orders out at +2.4% MoM and +20.1% YoY vs. +0.5%/+17.4% expected, respectively and vs. +16.5% YoY in Jan.
Upcoming Economic Data Highlights
- Canada Mar. Ivey PMI (1400)
- UK Mar. NIESR GDP Estimate (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- Australia Mar. AiG Performance of Construction Index (2330)
- Australia Mar. Employment Change and Unemployment Rate (0130)
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