feedback
FxProTV

Weekly Look Ahead 30th May

FxProUpdates

FxPro Forex Analysis: The ECB won’t weaken the euro

Whatever policy measures the ECB announces at its June meeting, they will scratch the surface of Europe’s deflationary threat and the impact on the currency will be marginal at best. Here’s the underlying analysis for both views. The issues prior to the financial crisis are well documented, but one was the fact that wage costs and prices in the peripheral nations (Italy, Spain, Greece, Ireland, Portugal) were running ahead of the Eurozone average, making their economies uncompetitive. On average, inflation rates were running 0.7% above Eurozone inflation in the period 1999-2008. Over the past year, inflation in peripheral nations has run 0.4% below the Eurozone average. In a single currency zone, for peripheral nations to regain competitiveness, the only viable option available is for a lower inflation rate vs. those core countries with which a gap in competitiveness has emerged. A narrowing of the gap via a gain in productivity is exceedingly difficult to achieve in a low (or negative) growth environment, not least because needed structural reforms are that much more difficult to implement. Naturally, there has been a strong reluctance from Germany to accept a higher rate of inflation as a means to reducing the deflationary threat, allowing core countries to maintain a positive inflation rate. This is why it has taken until now for the ECB to be in a position where more unconventional measures can be considered. On those measures, each will have only limited impact. We previously pointed out the limited link between ECB official rates and the interest rates paid by households and businesses (see “Why the euro will do well”). Furthermore, the impact of a negative deposit rate is going to be very limited. This is the rate at which banks are remunerated (currently zero) for parking overnight funds back at the ECB, which they do not want to lend out. The amount parked has fallen by more than 80% over the past year. Generally banks have less liquidity sloshing around, partly because they have been re-paying loans back to the ECB. The thinking is that this greater willingness to lend will push market interest rates lower, but the impact will be modest at best. So what does this all mean for the currency? In the bigger picture, not a lot. We can either look at the euro from an interest rate perspective or portfolio (flow) perspective. The changes in market interest rates are going to be marginal. Don’t forget that EONIA and Libor rates are higher vs. the time they last cut rates 6 months ago and ECB data shows minimal net changes on interest rates paid by households and businesses (which naturally any credit easing scheme will aim to address). Far more important for the currency has been the outperformance of Eurozone asset markets. Peripheral bond and stock markets have outperformed the US so far this year, attracting capital in a yield-starved world and once again undermining euro bearish views (we were relatively bullish in Q1 – see “The euro defying expectations”). The bottom line is that the ECB is looking into a pretty depleted tool box, with old weapons for tackling deflation and pretty second rate new ones. As such, there are no grounds for expecting a major negative impact on the currency. Given the level of expectation that has built up, if there is any hint of disappointment next week, the euro could initially rally.

FxProUpdates

FxPro Forex Analysis: Going to the dollar plan

We reach the last day of the month and also a Friday, which brings risk of greater volatility than we’ve seen in recent days as institutional investors and others adjust positions and hedge into month end. We pointed out at the beginning of the month that May has traditionally been a good month for the dollar in recent years and although the dollar has risen overall, it has been modest in comparison to previous May’s. After the weaker than expected US GDP data yesterday, which revised the first quarter into negative territory, the dollar was weaker, but managed to recover into the European close. The overnight session has seen the yen gain, with weakness on USDJPY the main exception to the firmer dollar tone during May (the other being the CAD). Inflation data in Japan was broadly in line with expectations, headline prices jumping to 3.4% on the back of the sales tax increase. Data for Tokyo for May was a touch firmer at 3.1% (from 2.9%). The remaining data for today, such as income and spending data in the US, alongside final Michigan confidence data, is unlikely to take precedence over month end positioning. Watch EURJPY, which is sitting bang on the 200d MA at 138.37, which provided strong support 21st and 28th of May.

FxProUpdates

FxPro Forex Analysis: Clawing into month end

FX markets are likely to see a subdued session today, with several European countries away for the Ascension day holiday. As we mentioned in our daily, AUDNZD was the most interesting move overnight, pushing above the 1.0950 level to take it above levels seen in early February and to tackle levels last seen in mid-December. This cross was the big mover of last year and with New Zealand having raised rates to 3.00% many were looking for continued downside, but the Aussie has continued to perform well, so this latest moves will have likely shaken out more Aussie shorts, but it's difficult to take on a more bullish stance should New Zealand pause its tightening cycle this year, as seems likely.

FxProUpdates

FxPro Forex Analysis: Aussie resilience

In terms of overnight trading, it’s the Aussie that has caught the attention, with a push just shy of the 0.93 level on AUDUSD helped by data on private capital expenditure, with the move more triggered by the move towards 1.0950 on AUDNZD after the break above the previous high of 1.0912 which was offering pretty stiff resistance. If we break above the 1.0950, then AUDNZD will be pushing levels last seen the middle of December. Once again, the Aussie is pushing against developments in China which from some angles should be arguing for a weaker currency. The other interesting currency, even though if not in the price action overnight, is sterling. The minutes to the latest MPC meeting last week showed that some members of the MPC were seeing the rate decision as being more finely balanced. There is an interview with one of them in the FT today (Martin Weale), who is one of these members. Although he argues that it is not so urgent that it needs doing now, but says that we can wait a bit longer, without defining longer. In summary, we are likely to see some members voting for a rate hike in the coming 2-3 months, something which is likely to be reflected in the currency at some point as well over that time. For today, several European markets are shut for the Ascension day holiday, which will likely keep trading ranges tight. Watch for US GDP data later in the day, with expectations for this to be revised into negative territory for the first quarter, after the mere 0.1% annualised growth seen on the first estimate. The dollar will naturally be disappointed with anything weaker than the -0.5% expectation.

FxProUpdates

FxPro Forex Analysis: The Themes Driving Forex

There are three broader themes to consider in FX this week. Firstly, China is in the frame once again as the yuan weakens to a 4 week low. As always, there is not necessarily a specific trigger to the latest bout of CNY weakness, but as always concerns regarding loan quality in both the bank and non-bank sectors are never far from the minds of markets participants. USDCNY is back above the 6.2550 level for the first time in 4 weeks, this coming after a period of reversal of the yuan weakness that dominated February to April of this year. The other theme is sterling. The latest speech from BoE governor Mark Carney last night did not go into policy details (focusing on wider issues around capitalism), but the pressure is likely to grow in the coming weeks for the Bank to start considering a move higher in interest rates. This may come towards the tail end of this year. We wrote last week about the need for central banks in general to start ditching forward guidance (see "Killing Forward Guidance") and the issue the bank faces is that if they leave it too late and are forced to hike rates more aggressively, the UK could be faced with huge affordability issues in the mortgage market. So for sterling, the scope for more gains as a rate hike moves closer is gaining credence. The final issue is the ECB. The central bank meets next week and there is little doubt that some policy action will be taken. The two unknowns are the form and the impact. In terms of the form, given that no one measure is likely to have a meaningful impact on the economy, we would expect to see a combination of measures, such as negative deposit rate, some form of quantitative easing, with perhaps a further rate cut on the main refinancing rate. The initial impact is likely to be felt on the currency, especially if Draghi chooses his words carefully so as to keep the currency on the defensive, but the longer-term implications are probably going to be less dramatic as the ultimate impact of the measures on lending rates to households and businesses is likely to be far less dramatic.

FxProUpdates

FxPro Forex Analysis: Shifting sands in Europe

There is no escaping the change in political mood in Europe after the publication of European Parliament election results over the weekend. There were wins for a spread of parties with manifestos against austerity, further EU integration and also immigration. On the face of it, the impact of this on markets has been pretty minimal, not least because it was widely expected. But there is a wider message that European leaders will no doubt be discussing at their meeting in Brussels later today, namely that national electorates are not happy with the EU and what it is doing (and trying to do). Ultimately, this is going to make further bail-outs and/or support mechanisms that much harder to put together in the future and any policies of further integration (which were seen as the means to avoid a future crisis) are not going to gain the required political support. For FX, it’s not something to get excited about now, but it could well be an underlying theme for the coming months. For today, markets return from holidays in the UK and US. The data is unlikely to rock the boat, with durable goods in the US, together with house prices and consumer confidence. Note that BoE Governor Carney is due to speak this evening and markets will be sensitive to any comments on the housing market or rates, given the growing discussion of the timing of a possible first rate rise. EURGBP stands just below the 0.81 level whilst cable is sitting just below 1.69. Both rates are key to watch into month end given the potential for further sterling gains on the rate story.

FxProTV

Weekly Look Ahead 26 May

FxProUpdates

FxPro Forex Analysis: Rolling into the weekend

The German IFO data was weaker than expected, the headline series falling from 111.2 to 110.4. EURUSD moved down to the 1.3630 as a result. There was also some follow through USD buying versus sterling, cable back to 1.6850. Still, the series is near a 3 year high and the GDP data this morning confirmed the earlier estimate of 2.5% annual growth in the first quarter of 2014. Capital investment was shown to be strong.