Currency Review 15/05/2009
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News
- EUR: German GDP grew by -3.8% q/q (-6.9% y/y) in Q1, vs expected -3.0% (-6.0 y/y)
- EUR: European GDP grew -2.5% q/q (-4.6%y/y) in Q1 vs expected -2.0% vs (-4.1% y/y)
- EUR: Consumer Price Index for April was 0.6% y/y
- JPY: Wholesale prices fell 3.8% y/y vs expected -3.0%
- CNY: FDI fell 22.5% y/y in April
Commentary
Headline GDP figures tend not to create much of an impression in the markets, given that the components of the figures tend to be factored in in the months leading up to the figure. As a result, it is also rare for the headline figure to be much outside the consensus forecast. It is therefore quite a shock that q1 German and Eurozone GDP figures were so much worse than expected. The most important component, German GDP posted a dismal -3.8% fall in output in the first quarter alone; the worst reading since 1945. It is perhaps surprising therefore that the currency market response was not more dramatic. EURUSD initially fell to just below the 1.3600 level from an overnight high of 1.3650. Enough green shoots appear to have emerged for the market to be more focused on forward looking data, consigning the first quarter of this year to the rubbish bin. Important US data out later today- including Industrial production, Empire State Manufacturing Index and the University of Michigan survey will determine how much longer the good news story seizes market sentiment. As I have stated before the wheels will come off this recent rally. When that happens the USD and increasingly the JPY will benefit.
Currency Review 14/05/2009
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News
USD: Producer Price Index for March was up 0.3% versus the 0.1% consensus forecast
USD: Initial jobless claims for the week ending May 2nd was 637k, versus the 610k consensus forecast
Overview
European equity markets closed fractionally up after a day which saw them in mostly negative territory. Lackluster price action has been the dominant them in the foreign exchange markets as little in the way of data has provided momentum. However, initial jobless claims data, which came in worse than expected has helped strengthen the argument that talk of green shoots of recovery is premature. The poor US retail sales data for April was a useful reminder to the exuberant equity markets that there is still no actual recovery taking place. Other concerns about economic growth yesterday came from China, which showed a slowdown in industrial growth and production of electricity in April; raising uncertainty over whether a Chinese recovery is taking place. Similarly, yesterday’s UK Bank of England quarterly inflation report, gave a surprisingly dovish assessment about the state of the economy. The BOE warned that the lack of lending ability could seriously hamper any recovery of the economy. Mervyn King expressed great uncertainty about the future direction of the UK economy, saying “Judging the balance of influences at the moment is extraordinarily difficult”. Meanwhile, in the Eurozone industrial production data yesterday showed a 20.2% drop in the year to March, the steepest year on year fall since records began in 1991.
The correction taking place in investor confidence has had little impact on the currency markets, although the USD has regained some of the ground it lost to many of the major currencies. Momentum against the dollar has, for the time being, been halted. The exception to this is the JPY, which has strengthened significantly in the last few days. USDJPY tested a low of 95.10 earlier, the 100 day SMA and yesterday’s low. A breach below would see the currency pair targeting the March low of 93.50. Bank of New York Mellon attribute the JPY’s recent rise to three factors. First, a declining interest by Japanese investors in foreign bonds, as a collapse in yields around the world has made domestic markets relatively more attractive. Second, about a third of Japan’s exports go to China, Korea, Taiwan an Hong Kong; the economy should benefit from a pick up in economic activity in China. Third, the allocation of the JPY in the portfolio of FX managers which has until now been low should rise due to the disappearance in yield differentials- being underweight the yen is less rational than it once was.
The Week Ahead 11/05/2009
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News
- CNY: China posted a third month of deflation, with consumer prices falling 1.5% y/y in April. Producer prices fell 6.6% in the same period
- EUR: French industrial production declines 1.4% in March, vs -0.5% consensus. This is fifth month in row that the figure in France has been greater than 1%
- GBP: Lloyds TSB Corporate Markets Business shows the headline balance of firms expecting brighter trading prospects over the next 12 months rose to +14 % points from -4 in March, the highest level and the first positive reading since November.
Commentary
Following the giddy heights of risk appetite reached towards the end of last week, particularly when it coincided with the results of the stress test and the announcement that over half a million Americans had lost their jobs in April, it was unsurprising that sobriety should return to the market this week. Despite the release of some figures in Australia and the UK suggesting a pick up in business confidence, this morning’s trading has been weighed down by deflationary data from China; in line with expectations and confidently explained away but checking some investor’s views of China being recession proof. The paring back of risk appetite has come at the expense of the Euro and Sterling, which have sold-off against the US Dollar this morning. EURUSD and GBPUSD have both fallen about 100pips from the initial highs. Data out later this week should problems for bulls, leading to a serious of USD positive scenarios, including data on US Retail sales, CPI, and the Trade Balance. Ben Bernanke is due to talk about the results of the stress test, which has been given a remarkably positive welcome by the market thus far. Sterling is likely to experience greater volatility than of late with the release of employment data and the quarterly inflation report. Similarly the EUR is likely to experience volatility, although this will be mostly due to world risk appetite, as data is light. The 200 day SMA, around the 1.348 level is likely to provide support,
Trading Strategy
EURUSD: Current Spot- 1.3580 Sell at 1.3500, Target 1.3380, then 1.32
GBPUSD: Current Spot- 1.5112 No current trade but sell at 1.5040, then target 1.4830
USDJPY: Current Spot- 97.86 Sell at current spot, target 96.70. Stop loss at 98.15 (break out of 200 day SMA)
Currency Review 08/05/2009
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News
USD: Non-Farm Payrolls for April fell 539K, lower than the consensus forecast of 610K. Unemployment rate is at 8.9%, a 25 year high
EUR: German exports rose by 0.7% m/m in April, higher than the consensus forecast and the first rise in six months
AUD: RBA has revised down forecast for 2009 GDP growth to -1.0% from 0.5%
Commentary
The momentum of optimism in the markets has continued unabated today with equities moving higher on the back of data that, while hardly cheery, isn’t quite as dismal as a month ago. In the US the Non-Farm Payroll figures came in slightly better than expected, although 539 thousand jobs were still lost. Some fundamentals appears to show some decline in the severity of the downturn and even the occasional data shows recovery, such as the surprise decline in Australian unemployment in April. Such news is encouraging, particularly given that the full effects of the large fiscal stimulus measures have yet to be felt. However, despite some encouraging signs the global economy is still some way from the bottom of the downturn. Most independent economic forecasts predict a weak recovery in 2010 and for some years afterward, as the de-leveraging of the American consumer continues and global imbalances in savings and consumption are addressed. Instead, the market is acting as though we should expect a Alistair Darling style V-shaped recovery. For this 2 month market rally to continue economic data needs to outperform expectations for some time and, rather looking for hope in some second derivative market participants will require more Australian-style surprises before we witness a sell-off. EURUSD has recently begun to correlate strongly with risk appetite and direction in the equity markets. While it appears that there could be further for single currency to run against the greenback- perhaps targeting 1.40 in the next few weeks, the risks to a flight to safety remain. The US dollar may be down, but it not yet out. Better than expected German data helped support the euro, but the economic conditions remain weak and fiscal and monetary response remains weak.
Currency Review 05/05/2009
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News
- AUD: RBA keeps cash rate at 3%- “signs of stabilisation, Chinese economy has picked up speed”
- AUD: Building approvals up 3.5% vs 2.3% consensus forecast
- AUD: AIG performance of services 39.8, vs 35.5 previous
- CHF: SNB will use currency policy to prevent deflation
- GBP: PMI construction reading 38.1 vs 31.9 consensus forecast
- EUR: Factory gate prices fell 3.1% in the year to April- biggest drop in 22 years
- USD: Bernanke expects economic recovery by end of year, warns of credit market relapse
Commentary
The last six months has seen market participants often acting in unison to the dramatic financial developments that have unfolded. In currency markets this has been demonstrated by the strength of the USD and the JPY against other “high beta” currencies, such as the AUD, EUR and GBP. A reduction in confidence generally meant that the Dollar and the Yen would rally against currencies that typically did well when equity markets rallied. Now, as certain markets are showing signs of recovery following the global economic freefall, appetite for risk is becoming more varied with some markets beginning to turn bullish as prospects look increasingly good for a sustained recovery.
The Australian dollar has been chief beneficiary of the G10 currencies from this more benign environment. The AUD has gained more than 14% against the USD since March 4th; around the beginning of the most recent rally. The RBA’s decision to keep its cash rate at 3.00% was accompanied by a statement expressing confidence in the Australian economy, making reference to China’s seemingly strong recovery. What was particularly encouraging was economic data released this morning showing a resilient and strengthening domestic economy, with construction and consumption both posting healthy gains. The AUD has rallied strongly against the dollar, building on the gains made on Friday.
Sterling has also been a gainer in this increasingly sanguine mood. Better than expected construction data suggested that, at the very least, the rate of decline in construction is slowing and confidence is no longer at rock bottom. Renewed confidence in the banking sector and more generally the financial system- LIBOR is now below 1% and, more importantly, the TED spread is back to pre-Lehman levels- has been beneficial to Sterling, whose country has relied so heavily on financial services. GBPUSD is now near the top end of its 2009 range. However, the currency is looking vulnerable. The Fed’s Stress Test results are released on Thursday and are widely expected to conclude that a number of banks need fresh capital. A renewed focus on toxic assets, a very important part of the current problem, could see confidence fraying and a sell-off in Sterling. In the meantime though, it is likely to benefit from the more upbeat mood; at least relative to other European currencies.
The EUR continues to look weak, with more worrying deflationary data and an increasingly incoherent policy response by monetary and fiscal authorities. Open splits are appearing between the ECB members about the threat posed by inflation. Similarly, the ruling grand coalition in Germany looks under strain, with the CDU and SPD looking more like parties in competition rather than partners in government. The European Commission expects economic recovery to start in the second half of 2010, later than most other G10 countries. With so many variables and such tentative steps and indecision this could drag on for much longer. Germany is expecting a decline of 6% in GDP for 2009, worse than any other large developed world country save Japan. The EUR is not gaining to the same degree as other currencies against the USD in these relatively optimistic times.
FX Review 01/05/2009
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With most Asian markets and continental European exchanges closed today market activity has been subdued this morning. In the foreign exchange market most currency pairs have traded in narrow ranges, following a volatile couple of days that has seen real changes to the dynamic of the role of the dollar as a gauge of risk appetite. EURJPY- a typical gauge of risk appetite, rallied 100 pips overnight in Asia.
In the UK a better than expected Manufacturing Index data and figures showing a rise in net dwellings helped Sterling rally almost 100 pips against the USD to the 1.49 handle. EURGBP fell below the 200 hour SMA of 89.50 to trade as low of 0.8894. The mood for the UK economy has certainly lightened over the last week. Bank stocks have risen higher, helping the FTSE post its largest monthly rally (8.1%) since April 2003. A more complicated economic picture with enough “green shoots” in earnings and economic data to pounce on has helped sentiment. However, this is unlikely to last. There is still very little chance of any substantial recovery in the housing market, financial services industry or consumer growth. These factors make any talk of 3.5% growth in 2o11 sound ridiculous. The government is relying on that target and needs credibility for successful gilt auctions.
On a global level, there is renewed confidence among the investment community that China’s economic stimulus may allow it to reach the official projected 8% growth rate this year. This confidence has been borne out by the signficant rallies this week in currencies of countries who export a lot to China- the Korean Won, Australian Dollar and the Peruvian Nuevo Sol.
The EURUSD and GBPUSD relationships with risk appetite have been complicated by the fact that the USD is losing its strong negative correlation with risk appetite- ie it has shown bouts of strength at the same time as confidence has returned in other markets. A clear pattern has yet to emerge. Next Thursday’s Stress Test results will be the make or break for the latest bull run and could see the USD regaining its safe haven status vis-a-vis other G10 currencies.
FX Outlook 21/04/2009
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News
- German ZEW data- a measurement of investor sentiment- is much better than expected: a 2 year high of +13
- German Producer Prices fall 0.7% in March- largest fall since Sept 2002 and below market expectation of 0.3%.
- UK Consumer Price Index fell to 2.9% from 3.1% in February. Signs of price stabilisation in non-core component
- Bank of Canada surprises market with 25bps cut in interest rates to 0.25%. Says will maintain rate for one year
Commentary
Following yesterday’s return to sharp return to risk aversion yesterday, witnessed in a rally in the USD and JPY, today’s price action has been more mixed, with country specific indicators providing sentiment support, while worries over the US banking sector, global consumer demand and doubts over the extent of the recovery in China are strengthening the case of bears in the market. The German ZEW index was sharply higher for April, leading to a rally in EURUSD up to 1.2990 before falling back on on negative corporate news from the US. The ZEW is not the most important indicator for sentiment, given that it is investors rather than corporates or consumers who are surveyed and as such is less representative of the ‘coal face’ of the German economy. Lower than expected German PPI figures are more important as yet another argument for lower interest rates can be levelled at inflation hawks, and so increase the chances that the divided ECB will take a more aggressive stance following their next meeting in a few weeks. By contrast in the UK, the GBP may have benefitted from figures released this morning showing some stabilisation in inflation; specifically a rise in the non-core RPI in March of 1.7% from 1.6% in February previously. Such stabilisation suggests that the Bank of England can afford to pull back once the current quantitative easing measures end in June. Strong results from Tesco and Burberry Group have given investors confidence that the worst of the downturn in the UK is over. Retail Sales figures at the end of the week will give a clearer picture. At the time of writing risk appetite looks to be reappearing with the USD giving back most of the gains it made against EUR earlier in the European afternoon. US Treasury Secretary Geithner’s comments that most banks have more capital than they need is USD negative. The US Dollar looks like re-establishing its role as the safe haven currency for the time being. As mentioned in previous posts, US corporate earnings over the next couple of weeks and news about the health of the US financial sector and consumer will prove decisive in the direction of the Dollar. However, the risks remain most definitely to the downside, and so now may be the opportunity to establish new Dollar long positions, particularly against the EUR.
Trade Recommendations
EURUSD: Bias- Short. Target 1.2880
GBPUSD: Rangebound: Strong rally today to 1.4700 should be followed by consolidation
USDJPY: Bias- Long. Target 99.70
FX Weekly View 18/04/2009
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FX Commentary– Risk appetite continued to rise this week, but only just. Equity markets have posted their sixth consecutive weekly rise, with the S&P gaining 1% to 867 and the FTSE 100 gaining 2.6% to climb above the 4000 level. The continued buoyancy in the market has been helped by some key Q1 corporate earnings numbers that surprised to the upside and economic data that suggests, in the US at least, that the pace of economic decline is slowing. Currency markets have largely reflected this buoyant mood with cyclical and commodity currencies like the GBP, AUD and CAD performing strongly. Sterling is performing well in this environment. In addition to its strong traditional high beta performance, the currency has benefitted from data showing that the domestic housing market and global financial services may be stabilising. The options market (expressed in risk reversal pricing) shows the strongest market support for the pound in four years.
By contrast the Euro, which has been very closely correlated to US equity market indices and hence risk appetite in the last six months, has been the G10 main under performer in the last week. Investors are not impressed with the continuing uncoordinated fiscal policy response by the various governments, but particularly Germany and France. All other Eurozone countries are being tarred with teh same brush. Moodys announced this week that it was expecting to lower Ireland’s credit rating, despite drastic action taken by the government there to rebalance the economy and tighten its fiscal deficit. In monetary policy the ECB appears to be showing greater signs of disagreement among its members over the next steps forward with regard to interest rates and quantitative easing. To add to the mix, Trichet implicitly talked down the Euro for the first time. Currency markets responded accordingly. The EUR ended the week lower against most currencies, breaking its relationship with global risk appetite. Until such time as there is more concerted effort to boost aggregate demand and put inflation worries to one side the Euro looks likely to take Sterling’s place as the weakling.
The US Dollar looks set to benefit from further recovery in sentiment or a flight to safety. This week’s rally in both equities and the dollar looks set to confirm the market’s expectation that the US will exit recession before other developed nations. Tics data out earlier in the week shows renewed capital inflow into the US markets; away from government debt to equities and credit. In times of crisis the safe haven trade still remains.
USD: Bullish
EUR: Bearish
GBP: Bullish
JPY: Bearish
Technical levels and trade recommendations to follow……..
FX Update- Few signs of flattening-back to safety 15/04/2009
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The market has taken an indecisive turn with recent economic and corporate indicators. Surprises abound, with Goldman Sachs reporting better than expected Q1 earnings, while US retail sales data took the wind out of the markets sales, showing a worse than expected decline of 1.1% in March. News this morning that UBS was planning a further cut of 7,500 jobs added to the unease, although most investors are clearly cautious about calling a bottom to the market. In this climate of uncertainty, the EUR has be the currency to take the greatest punishment. After a bearish night in Asia the single currency has suffered at the hands of both Sterling and the Dollar. A story in today’s Daily Telegraph reported that one third of European junk bond credits could default on debt given that there was no prospect for pick up in demand for exports. The EUR had earlier reached a high of 1.33 against the USD before comments from the ECB’s Weber that indicated the central bank would announce a package of non-standard measures (read quantitative easing) in May; valid for the rest of the year and into next year. At the same time he said that cutting the benchamark refinancing rate below 1% would risk paralysing the money markets.
In the US, talk of a flattening of the downturn (as per Larry Summers and President Obama yesterday) may still prove premature, with much of the data released surprising to the downside. US Capacity Utilisation in March reached a lower than expected 69.3%- a new record- whcihle industrial production came in at -1.5% against an expected 0.9%, and a reading of -1.5% in February. Consumer Price data was -0.4% y/y compared with 0.1%. However, there were some encouraging signs, in the form of the Empire survey, which showed a significant improvement to -14.65, compared with the market expectation of -35. This may indicate that inventory drag is beginning to be worked off and that demand is beginning to stabilise, albeit at significantly lower levels.
In the UK, the RICS house price survey showed the house price balance rising to -73.1 in March; in line with expectations. Sterling performed strongly against the USD, briefly breaking the 1.50 level, and the EUR with EURGBP breaking below 0.88 from over 0.89; a sharp sell-off for a traditionally low volatility currency pair. Sterling looks bid at the moment, with signs that it could break out further against the EUR. A report shows that that options market is the most bullish on sterling for four years. With both technical and fundamental indicators working against the Euro, shorting EURGBP remains the favoured trade. Given that the 0.88 level has been broken, the next key level of 0.8770
FX Weekly Outlook-Pt 1: USD, GBP, EUR 14/04/2009
Posted by chrisdshaw in Economics, FX.add a comment
Overview– The titans of economic growth, the US and China, claim their rightful place at the centre of currency markets focus this weeks, releasing a slew of economic news. Risk appetite has been the all-pervasive driver in recent weeks, although the direct correlation with dollar weakness has been blurred somewhat with the yen regaining some of its risk appetite status and EURUSD losing its almost perfect correlation with the S&P 500. News of better than expected earnings in the banking sector has helped drive higher yielding currencies higher, with Sterling and the Aussie being chief beneficiaries over the quiet Easter period. However, given a slew of corporate earnings over the next few weeks, ongoing problems in the financial sector, and important economic data out in the US this week, a correction to the recent rally is highly likely and with a reduction in risk appetite.
USD: Trade: Short EURUSD: Target 1.3190 (100 day- Moving average)
US Dollar– The greenback’s continued role as a safe haven currency should help it maintain its value if market sentiment deteriorates. By the same token, if the much vaunted ‘green shoots’ of recovery emerge, heralding the beginning of the end of the downturn, it is widely expected that these will be seen in the US first. This should whet global investor appetite for US stocks and so prevent any significant fall in the dollar. In any case, the current level of risk appetite is likely to diminish. Last week’s FOMC meeting minutes showed a concern for the ‘very fragile’ credit conditions and renewed concern for the ‘fragile and unsettled’ financial markets. Despite what equity markets may believe, banks are still refusing to open up credit lines and toxic assets remain in the system. There are rumours that the Treasury has instructed the US banks that are subject to the ‘stress test’ not to disclose results during earnings season, so as to prevent a perfect storm of bad news raining on the market. The problems in the financial sector will take time to resolve. In the meantime, data out this week includes notable indicators including housing, production and consumer spending- providing the market with a good picture of conditions.
GBP- Trade: Short EURGBP at 88.45. (Current spot 89.00). Target 87.25 (Feb 24th low)
GBP– Sterling has climbed on the back of the recent rally in equities. The currency is strongly correlated specifically to sentiment on the financial sector. News about Goldman Sachs’ better than expected Q1 results have helped the pound against most G10 currencies. With little in the way of data this week- other than the RICS house price balance out on Tuesday- currency direction will take its cue from risk appetite. In an environment with a sharply lower risk appetite sterling should fall, specifically against the USD. However, a rally in bonds could support see sterling higher if risk appetite remains relatively high. The Bank of England is stepping up its purchase of gilts and corporate bonds, to more than GBP 6.5bn this week, compared with GBP 6bn in previous weeks. EURGBP should be the main long sterling trade in this environment. The pair is already trading close to its six week low of 88.50. A break below that should see a bearish bias.
EUR- Bearish. Short EURGBP– see above
EUR– The single currency was the worst performing G10 currency last week, and has stumbled in European trade this morning. Last week’s ECB monthly bulletin showed clear risks of a Eurozone deflation and implied that the ECB would cut rates further in the near future. Output, consumption, manufacturing and confidence are in dire state across the region and the pessimism in outlook is largely priced in. By contrast, Thursday’s CPI inflation data could provide substantial volatility as expectations differ widely. ECB expectations are for a reading of 2%, compared with a market consensus forecast of 0.6%. Another reason to feel bearish about the Euro is the imminent market correction in equities. EURUSD has lost its correlation with the S&P500 in recent weeks, as the market rally in the US has not been reflected in confidence in the European currency. This could return when the equity market rally correction occurs.
Brave New World 