Forex News and Events
Global gridlocks conditions persist as uncertainty has decreased and central banks retain their easing stance. Lowering the risk level, Greece made €450mn debt payment to the IMF on Thursday, which pushed Greece yields lower (Greece-German 10-yr. yield spread narrowed by 25bp) and allowed European equity markets to participate in the global risk rally. USD was slightly lower. News that China’s CPI was subdued and deflation threat unremoved, supported risky assets in the Asian session. China CPI inflation came in at 1.4% y/y above expectations of 1.3% y/y but steady from prior read. Markets anticipate that Chinese policymakers will continue to act proactively to support suboptimal growth and weak inflation through fiscal and monetary easing. Asian regional equity indices went on a tear, but China and Hong Kong were notable outperformers. The Hang Seng, in its seventh consecutive positive day, benefited from heavy Chinese buying thru Shanghai-Hong Kong Stock Connect program. The Nikkei 225 briefly broke the 20,000 psychological level for the first time in 15 years as data suggest additional easing in October. We remain highly constructive in the CNY while remain bearish on JPY (primarily verse the USD). Today we have a light economic calendar allowing current high beta currencies (FX commodity block and EM) to continue to appreciate verse the greenback. That said, with the US yield curve steepening, U.S. 10-Year yields now approaching 2.00%) traders should see demand rotate back into USD.
Currency skirmishes continue
This current phase of global currency wars was never about formal proclamations or grand gestures, but more fought as a guerrilla war. The US Treasury Department semi-annual report on International Economic and Exchange Rate Policies released yesterday warned Europe against relying too much on exports driven growth. The usage of “flexible” in the report is a polite way of say stop competitively devaluations. The language of the report is a clear indication that currency wars are still raging (despite official denials). US policy makers are now worried about the strength of the USD will derail its economic recovery and are taking strategic (yet subtle) actions. Interesting, it was ex-Fed Chair Bernanke who endorsed the theory for devaluations to support global rebalancing. Which was use extremely successfully to revitalize the US economy as rounds of QE kept USD artificially weak (EUR/USD 1.5144). Now the tables are turned, with the ECB unleashing QE, debasing the EUR and stealing export growth. We expect this unobtrusive struggle to begin to heat up as the Fed heads towards its first interest rate hike in September and USD continues its bullish drive.
Banxico on the trigger
Mexico CPI unexpectedly picked up data released yesterday showed. Headline CPI rose 0.41% m/m vs. 0.32% exp (core 0.26% vs. 0.25% m/m) in March. The yearly read climbed to 3.14% from 3.00%. The upsurge was due to rise in perishable prices and tourism ahead of the Easter holiday. The transitory nature of the inputs suggest that Banxico will not rely heavily on this data or drive monetary decision, although the upwards pace is concerning. In fact, minutes for the 26th March meeting were decidedly dovish as members held its reference rate at 3.00% in a unanimous vote. There was consensus that economic activity in Mexico continues to decelerate and will remain soft in 2015. Weakness has been broad with deceleration in exports despite weak MXN and industrial production due to low demand for oil. Inflation expectations were lowered closer to 3.00% (below the current read). Significant debate revolved around the time of the Feds first hike and where Banxico should be positioned. One member suggested getting ahead of the Fed, yet most preferred to wait till after the Fed hike. While a proactive hike remains on the table, we suspect that is low probably event. However, much depends on the market’s reaction to increasing US yields. Higher rates in the US could easily trigger a currency shock as foreign investors flee (chasing higher yields) Mexico and MXN deprecation exacerbates upwards inflation pressure. Banxico members are clearly aware of the threat and prepared to tighten monetary policy. Our expectation is for the Fed to begin hiking in September and in the buildup the potentially reaction in EM is concerning. Historically, MXN will get hit hard by Fed adjustment, especially if oil outlook doesn’t improve. Should FX EM stage a “taper tantrum” prior to September we would expect Banxico to move forward with a pre-emptive hike.
The Risk Today
Luc Luyet
EUR/USD has broken to the downside out of its horizontal range defined by the support at 1.0713 and the key resistance at 1.1043. A further decline towards the support at 1.0458 is favoured. An hourly support can be found at 1.0613. Hourly resistances stand at 1.0789 (09/04/2015 high) and 1.0888. In the longer term, the symmetrical triangle favours further weakness towards parity. As a result, any strength is likely to be temporary in nature. Strong resistances stand at 1.1114 (05/03/2015 low) and 1.1534 (03/02/2015 high). Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support).
GBP/USD has broken the support at 1.4753, opening the way for a test of the support at 1.4635. Hourly resistances can be found at 1.4765 (intraday low) and 1.4845 (intraday high). In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). Another strong support stands at 1.3503 (23/01/2009 low). A key resistance can be found at 1.5552 (26/02/2015 high).
USD/JPY has broken the resistance at 120.37, confirming an improving technical structure. A resistance can be found at 121.20. Hourly supports lie at 119.86 (09/04/2015 low) and 119.64 (07/04/2015 low). A long-term bullish bias is favoured as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).
USD/CHF has broken the resistance at 0.9757, validating a double-bottom formation. The implied upside potential is given by 1.0023. Hourly resistances can be found at 0.9812 and 0.9984. Hourly supports lie at 0.9751 (intraday low) and 0.9674 (intraday low). In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. A key support can be found at 0.9450 (26/02/2015 low, see also the 200-day moving average).
