- Better IFO followed by profit taking on EUR-crosses
Markets have been trading without any clear sense of conviction, however the mood in FX and equities has been more riskoff. The concern appears centred on Spain with the IBEX down 1.60%, while other bourses are only about 0.20% lower- this however is at odds with price action in fixed income with Spanish yields down about 5-6 bps across the curve. A better German IFO reading in March failed to support EUR-crosses, only to be followed by a bout of profit taking. Looking ahead, risk sentiment will be heavily influenced by developments in Spain and hopes for an expansion of the EFSF/ESM firewall ahead of the Eurozone finance ministers’ meeting at the end this week. Weekend reports suggest that Germany and Finland – both previously opposed to the idea – are softening their positions. If a deal can indeed be reached, then expectations will likely build for further commitment from the IMF at the Washington Spring meetings. The additional reassurance would be expected to have a EUR-supportive impact on peripheral spreads and Euro zone banks.
- Fed and ECB speakers, US and Eurozone data all key this week
This week again sees plenty of Fedspeak – we will hear from Messrs Bernanke, Plosser, Fisher, Lacker, Bullard and Rosengren – although the ‘data dependent’ characterisation of the current Fed policy debate means that data will probably be more important than Fed-speak in shaping Treasury market yields, and with that the USD. Wednesday’s durable goods orders should be the most important piece of economic news. In Europe, Thursday’s Eurozone sentiment indicators will be important in the wake of last week’s weak PMIs. The end of month slug of Japan data, including latest CPI readings on Friday, may have some bearing on JPY sentiment as we head towards the 9-10 April BoJ meeting. However we are not expecting any further action from the BoJ unless the Fed does something or the JPY strengthens sharply. Volatility in 2-year Treasury yields should remain the key USDJPY driver, although financial year-end flows and a raft of new investment trust offerings will also factor. We continue to target Y85 during Q2 – but also continue to see USDJPY lower in the medium term.
- Lower USDCNY fixings should help EURAUD decline
The PBoC this morning fixed USDCNY at a new post-revaluation low, continuing the gains of last week, amid more suggestions of a widening of the trading band. There were also comments from PBoC deputy governor Yi Gang, who cautioned about the costs of adding further to FX reserves. The PBoC may be attempting to reverse this month’s return to pricing in of CNY depreciation – which carry significant risks to stability in CNY markets – although markets have not taken the hint this morning. A return to pricing CNY appreciation would have positive implications for AUD; and if the suggestion is that such appreciation might be met with reduced intervention, diminished recycling into EUR should see our EURAUD short initiated last Thursday perform nicely. However, markets may decide that further CNY strength is unlikely while the data continues to disappoint: focus here will be on the weekend release of the official China manufacturing PMI, where risk of a sub-50 print appears high.
- IMM data shows AUD and NZD longs trimmed significantly; CAD long builds
Friday’s IMM data revealed a further unwind of extreme positioning in AUD and NZD suggesting that further downside may be somewhat harder to come by from here unless incoming China economic news deteriorates further. The popularity of CAD longs, at least on a relative commodity currency basis, is revealed in a near doubling of net speculative long positions (to 42k contracts). Net JPY shorts were scaled back to 26k contracts in the week through Tuesday, from 42k the week before (see Chart). See our ‘FX Strategy Flash: IMM positioning’ for full details.
BNP Paribas