- USD loses most of its earlier-week gains; soft US core a factor
A quick look-back shows the USD was actually weaker on the week (in DXY terms at least) and within G10 was only stronger versus CAD, NOK and JPY. USD gains earlier in the week followed the break higher in Treasury yields, the latter seen to represent a re-pricing of tail-risks both with respect to the US economy (double-dip risk) and the Eurozone (risk of a fresh crisis anytime soon), rather than deeper questioning of the Fed’s public policy commitments. Yet even though 10yr Treasuries closed the week more than 25bp higher, USDJPY was the only pair to show durable impact from this particular FX driver. EURUSD led Friday’s reversal in what may have been more a squeeze on short positions than a news-driven affair. That said, the combination of the weaker than expected US core CPI print (-0.1%) and further compression in most Eurozone bond spreads, largely driven by higher Bund yields, certainly helped. Other US data on Friday also played to reversal of earlier week USD gains. Industrial production came in flat against an expected +0.4% and the Michigan Confidence reading dropped to 74.3 from 75.3 against an expected 76.0 and pre-release ‘whisper’ number of 79.
- Fed-speak, US housing data, ‘flash’ Eurozone PMIs, all of interest this week
Following a dovish speech from Evans on Friday, there will be keen interest in what Fed chairman Bernanke and NY Fed President Dudley have to say this week (Monday and Tuesday respectively). Bernanke also speaks again on Thursday, while Kocherlakota (non-voting moderate hawk), Bullard (more hawkish of late), Tarullo (very dovish) and Lockhart (centrist) are also scheduled to appear. Fed-speak and incoming economic data should remain key FX drivers; unless the former deflates bond yields or the latter undermines positive risk sentiment, the USD should come to little harm. Home Sales and Housing Starts are the main US numbers this week while the Eurozone sees the ‘flash’ PMIs released on Thursday. There will also be EUR-specific interest in the progress or otherwise on efforts to agree on increasing the size of the eurozone firewall, following reports on Friday that one option being considered was to treat the EUR192bn already committed from the EFSF separately from the EUR500bn ESM (so increasing total firepower to EUR692bn). Whether this would be enough to see non-Eurozone sovereigns – China and Japan in particular – being willing to commit extra funds through the IMF, will be a major issue heading into the IMF Spring meetings. Incidentally, late Friday an IMF report warned of policy implementation risks linked to the upcoming Greek election and that bank solvency risk was ‘acute’. It claims disorderly Greek EMU exit would be unavoidable without the latest official support programme. The Greek election has not yet been called, but has the potential to create fresh angst when electioneering gets underway.
- IMM positioning data suggest ‘NAFTA rally’ should have legs; RBA minutes watched for FX concerns
Friday’s IMM data shows a further trimming in the net EURUSD short base among speculative investors, even though EURUSD traced lower during the March 7-13 reporting period. We see a slight extension of the AUD long – suggesting AUD is still vulnerable to a bigger position shake-out – and perhaps most significant, a significant expansion of the short JPY base (see chart). Also notable is that though CAD and MXN both show net speculative long positioning, there was very little positioning build last week and in neither case is the net long close to prior extremes. As such, the ‘long NAFTA’ trade may still have legs. Meanwhile, tomorrow’s RBA minutes will be watched for signs that the Board is becoming more concerned with the high exchange rate. But comments today from Governor Stevens suggest that he, at least, is relatively relaxed – not just about the exchange rate, but the Australian economy (“not too bad”) and indeed the long-term outlook for the Chinese economy. Stevens sees inflation remaining with the 2-3% target for the next few years; and said that the exchange rate will depend a lot upon the USD. We concur with this seemingly obvious but crucial point: US rates and their impact on the USD are likely to remain the primary drivers of FX markets.
BNP Paribas