The USD clearly has its back up against the wall to start the week, as EURUSD faces down the final relevant retracement level at 1.0840, USDJPY is teetering just under the Ichimoku daily cloud level and near local range lows, and the Antipodeans are storming strong to open the week’s trading after China’s PBOC declared a RR ration cut of 1 percent. I don’t quite understand why the market likes to react positively to the latter, as usually these kinds of central bank moves are rear-view moves due to economic weakness rather than signs that we should expect impending strength.
This week, the focus will be on whether risk appetite can right itself after last week’s meltdown on Greece (and perhaps simply to take a breath after European bourses were on such an incredibly run since the beginning of the year). Note that we are seeing more significant contagion now in the EU periphery than we have seen in a long time, with the club med peripheral spreads spiking wider last week in sympathy with the spike in Greek yields. Portuguese 10-year debt is 190 basis points wide to Germany relative to about 130 bps at the start of quantitative easing in early March. Spain and Italy are at around 140 bps wide relative to about 90 bps at the start of QE.
Chart: USDJPY
USDJPY is trading near key flat-line support in the 118.30/50 area and below the supportive offered by the Ichimoku daily cloud, which was crossed on Friday. A break of key support could lead to a bigger run lower – possibly toward the ultimate range supports near 115.00/50, but let’s take this one step at a time – as the pair has increasingly failed to move directionally over the last few months.
The G-10 rundown
USD: Has its back against the wall and no obviously important catalysts this week as next week’s Federal Open Market Committee meeting is shaping up to be a “we’re waiting for incoming data” affair.
EUR: There seems to be a negative correlation here with risk appetite along the lines of a traditional carry trade behaviour, so more Greece worries might damage EURCHF further, but could ironically prove supportive of EURUSD. Watching 1.0840 as the last resistance line in the sand within the range toward 1.10. Eurogroup meeting up at the end of the week could provide next major Greece headlines.
JPY: Inconsistent behaviour as it is caught in the middle of the pack relative to its G10 peers, but USDJPY has now pushed to key levels as we watch whether a break lower opens up for a try toward bigger range lows below 116.00.
GBP: 1.5000 could not fall on Friday in GBPUSD and EURGBP may correlate with EURUSD, so not sure whether we get anything interesting from GBP this week relative to euro pairs, though we do have a couple of interesting event risks.
CHF: EURCHF is on a grind lower that is likely correlated with sentiment on Greece/periphery – look for this to potentially continue toward the 1.0170 technical target and possibly to parity as long as this continues, but for the potential of very sharp rallies on any sudden parting of the clouds.
AUD: Supported on the China RRR move, but we should see such cuts as a sign of worrying weakness in China, so it's questionable how long this can support, particularly in an environment of weak risk appetite. Watching tonight’s Reserve Bank of Australia minutes for the latest guidance after the central bank failed to cut at the last meeting. Looking for eventual relative weakness versus especially the USD, but from here or not until from 0.7900 or even 0.8000? Bears may consider longer-term put options as discussed in this week’s FX 4 next week.
CAD: We’ve seen a chunky correction after a capitulation through the bottom of the range with a decent bounce reversal on Friday – watching whether this blossoms into something bigger, and it is clear we’ll need an oil price rally to get anything to the upside going. Meanwhile, the Bank of Canada’s governor Poloz is out speaking today.
NZD: Weak CPI failing to pressure the kiwi much as the focus is on the China RRR cut overnight. We’re nearing key zone of resistance in NZDUSD from 0.7700 toward the 200-day moving average as the preference remains one of looking for bearish reversals rather than the idea that we are about to launch any major new rally.
SEK: Odd activity last week, as a Thursday meltdown yielded to a Friday melt-up. Let’s see if tomorrow’s employment data confirms this bullish reversal from Friday or whether we are merely in a treacherous, churning range.
NOK: A much needed consolidation in EURNOK as we bounced from the recent lows, but that move changed the structure of the chart, putting us in bearish trending mode as long as we stay below the 8.50/55 line in the sand.
Economic Data Highlights
- China lowered its Reserve Requirement Ratio to 18.5% from 19.5% previously
- New Zealand Q1 CPI out at -0.3% QoQ and +0.1% YoY vs. -0.2%/+0.2% expected, respectively and vs. +0.8% YoY in Q4
Upcoming Economic Calendar Highlights (all times GMT)
- Euro Zone Feb. Construction Output (09:00)
- US Fed’s Dudley to Speak (12:40)
- Euro Zone ECB’s Constancio to Speak (13:00)
- Euro Zone ECB announces details of QE purchases (13:45)
- Canada Bank of Canada’s Poloz to Speak (14:05)
- Australia RBA Governor Stevens to Speak (17:00)
- Australia RBA April Meeting minutes (01:30)