- Weaker US housing data sees USD stronger? FX market still struggling for direction
FX markets on Wednesday continued to reflect a lack of conviction. Existing home sales disappointed, but despite the resulting rally in US Treasuries, USD finished stronger against most G10 currencies, gaining most against AUD – although, as would be expected given the tight relationship with yields, losing out to JPY. The yen received another boost this morning as the Japanese trade figures showed a return to surplus after four months of deficit. But the move proved fleeting, reinforcing our view that changes in Japanese trade data matter far less than changes in relative yields: incremental trade flows are dwarfed by any shift in the huge portfolio of capital built up through decades of trade surpluses. The ‘flash’ HSBC Chinese PMI came in at 48.1, sharply down on last month’s improvement to 49.6; the new orders component was even weaker at 46.2. AUDUSD has traded through the 1.0403 200dMA, finding support at the 100dMA at 1.0375 for now. We concur with RBA Governor Stevens’ view earlier in the week that a moderation in Chinese growth is both necessary and desirable; and that the Chinese authorities maintain considerable policy levers in their quest to engineer a soft landing. Nonetheless, the market has clearly been looking for excuses to lighten up on AUD positioning, so more softness through the day is probably to be expected. Beyond that though, liquidity and lower volatility should see demand for AUD re-emerge. The Kiwi meanwhile has been hit by a triple punch of a weaker Q4 GDP, the Chinese PMI and reports of higher Chinese tariffs on NZ milk imports, suggesting a further retracement higher in AUDNZD.
- Potential re-emergence of Eurozone stresses may undermine EURUSD; Eurozone PMIs to improve
EURUSD continues to trade within a tight range, with headline risk seemingly a thing of the past – but clearly Eurozone stresses remain in the background. Yesterday saw Spanish and Italian 10yr yields rise 17 and 10bps respectively; the sell off in Spanish bonds coincides with significantly wider spreads over the past few days in Spanish bank credit, suggesting that Spain may be next on investors’ radar. As for Italy, labour reforms proposed by PM Monti’s government are running up against resistance from one of the most influential labour unions. Political tensions are likely to resurface ahead of the local elections on this issue, but are unlikely to threaten Monti’s position given the strong popular support he enjoys. But such renewed political risk, coupled with the upcoming Greek elections, may undermine EURUSD in the months ahead, and we recommend a short EURUSD positions with a target of 1.28 (more details in yesterday’s FX Strategy Flash: EURUSD Risk Coming Back on the Radar: Target 1.28). This tactical position is based not only on the re-emergence of Eurozone stresses, but also as EURUSD currently trades above fair value metrics including benchmark swap yield spreads. For today, EUR can potentially receive a boost from the Eurozone flash PMIs: we expect to see an improvement, but they should still signal weak economic activity.
- UK budget should keep gilts bid, US jobless claims on the calendar
GBP suffered on Wednesday following the release of the MPC minutes as both Miles and arch-dove Posen voted in favour of expanding the BoE’s asset purchase programme. As for the budget, there was nothing to shake markets, and the fiscally neutral plan received a Fitch stamp of approval. This should help maintain the bid for gilts, in turn supporting GBP as a safe haven within the G10 space. UK retail sales are expected to increase on a y/y basis but decline m/m. Also on the calendar today is initial US jobless claims: Treasury yields are in focus, and US economic data remains crucial in the debate over future Fed policy. Chairman Bernanke’s testimony before Congress yesterday had minimal impact on the market; his lecture later today at George Washington University should also be a non-event. However, the Chicago Fed’s Evans, the FOMC’s arch-dove, is scheduled to speak. While he is likely to beat the dovish drum, it will be interesting to hear his perspective on what form further easing should take and how the improved labour market data fits in to his views.
BNP Paribas