• USD still soft but at middle of recent ranges vs. majors
• Can the ECB really manage to weaken EUR?
A quiet few days for FX since last Thursday as much of Europe, including yours truly, was off on holiday for a four-day weekend. There were few interesting developments as the JPY and CHF are on the weak side of recent ranges and the USD is still down, but not entirely out, as it trades in the middle of the recent ranges versus the Euro, Japanese yen, and Australian dollar.
Japan has reorganised the Government Pension Investment Fund, installing new committee members for the manager of approximately $1.25 trillion in assets. Abe has focussed on the fund’s investment strategy as a key reform objective, hoping to have the fund invest more aggressively. Watch for new announcements for the fund on how it will allocate funds from here, which will obviously have huge potential implications for the Japanese yen if foreign bond- and equity allocations are raised.
Chart: EURUSD
EURUSD and the ATR in the lower panel show the collapsing volatility in EURUSD to the lowest levels since mid-2007. Back then, the volatility continued even lower while the market tried to figure out whether the pair should head to the then all-time highs above 1.3650. As the US subprime crisis broke and the Fed moved with a large 50-basis points cut at the September meeting, the answer was an emphatic “Yes!”. This time around, it is about whether there is anything that can perturb the anticipated forward path for the Fed (slow tapering and an eventual first hike out around mid-2015) and whether the European Central Bank (ECB), though dovish, really can launch a QE-type easing that will weaken the single currency. Interestingly, the low volatility episode is coming around the same price levels. I suspect that volatility will bottom out soon as the answer to the ECB portion of the question is likely just ahead at the May or June meetings. Clarity on whether the anticipated Fed trajectory remains justified may take a bit longer. The downside in EURUSD has far more potential as any further upside from here will generate a vigorous ECB response.
Looking ahead.
Look out for the Australian CPI release tonight for direction in AUD crosses. The Q4 “trimmed mean” reading, which is supposedly an Reserve Bank of Australia favourite for measuring underlying inflation trends, came in at 0.9 percent quarter-on-quarter, and thus matched the highest reading since 2008. A slowdown to a plus 0.7 percent QoQ rate is expected for Q4, and I would be very surprised to see an upside surprise to that level after the trade-weighted AUD exchange rate bottomed quickly and early in Q1 and rose sharply into the end of the quarter. It looks like AUD is beginning to struggle at these levels, though it has lacked new impulsiveness. The 0.9300 looks like the near-term line in the sand support for AUDUSD. AUD hasn’t been particularly sensitive to Chinese data releases, a bit of a conundrum, though AUD traders should also note the preliminary release of the HSBC China Manufacturing PMI.
A preview of the key economic calendar highlights for the week (beyond tonight’s data discussed above). Sterling should get considerable focus this week with the Bank of England (BoE) minutes up tomorrow and GBPUSD trading near the highs for the cycle while EURGBP is pushing down on important support. The kiwi (NZD) will also receive considerable attention on the Reserve Bank of New Zealand (RBNZ) rate hike and latest guidance.
Wednesday
- Europe – preliminary Markit Manufacturing and Services PMI for France, Germany and Eurozone. Germany’s numbers have been flattening and even weakening in the last couple of months – these readings are key for a general status check on the Eurozone recovery.
- UK Bank of England Minutes – the debate within the BoE on the amount of slack in the economy gains increasing focus after the unemployment rate plunged to under the BoE’s old 7 percent target in February and forward rate hike anticipation (gauging the timing of the first 2015 hike) is heating up again.
- US Mar. New Home Sales – the rate has been more or less flat for the last five months and is at the same level as early 2013 – market will want a spring bounce for March and/or April, otherwise we’ll have to look elsewhere for a contributions to the US recovery story.
- New Zealand RBNZ Official Cash Rate – another 25-bp hike to 3.00 percent is expected. NZD has not been enjoying much strength despite the anticipation of a string of further hikes to the OCR, suggesting that perfection is already priced in and that NZD will be very vulnerable to dovish language and or weaker risk appetite in general.
- Germany Apr. IFO – a key survey for Germany. The expectations component came off sharply in March and has proven a good leading indicator in the past. Another drop suggests Germany economy is facing stronger headwinds.
- US Mar. Durable Goods Orders – this has been a weak spot in the US economic data.
- US Weekly Initial Jobless Claims – last week’s was the lowest of the cycle, so this series gaining increasing focus, though we likely have some seasonal effects until we get out of the Easter period.
- Japan CPI – policy anticipation rises if inflation rises begin to slow too much
- UK Mar. Retail Sales – the consumption side of the UK recovery has remained strong, but some risk of mean reversion after a very strong Feb. reading and a history of mean reversion in the data series.
- US Final Apr. University of Michigan Confidence – confidence has been at the high end of the range of the last few years, but still at historically depressed levels if we look pre-2008.
- Sweden Mar. Unemployment Rate (0730)
- US Apr. Richmond Fed Manufacturing Index (1400)
- US Mar. Existing Home Sales (1400)
- Euro Zone Apr. Consumer Confidence (1400)
- US Former Fed Chairman Bernanke to Speak (1545)
- Japan BoJ Deputy Governor Nakaso to Speak (0025)
- Australia Q1 CPI (0130)
- China Apr. Preliminary HSBC Manufacturing PMI (0145)