- USD performance mixed in undecided market; negative AUDNZD outlook may extend
The resonance of Fed Chairman Bernanke’s dovish comments seem to have faded in the FX markets on Wednesday as USD performance was mixed, with the commodity block under some pressure. While the February durable goods number was an improvement on January, it came in below expectations and thus failed to boost sentiment; and with concerns over the Chinese economy to the fore, AUD ended the day as the worst performer. Chinese stock markets remain under pressure today, threatening a further break to the downside. The outlook on AUD is unlikely to turn around until we see get some reassurance that the Chinese economy is not weakening too much – the weekend release of the official Chinese PMI will be key in this regard. Meanwhile, our short AUDNZD position, established March 8, from 1.2900, targeting 1.2500, has benefited. The pair saw seeing further selling on the release of stronger NBNZ business confidence and activity outlook prints this morning. With Eurozone risks abating and the New Zealand economy improving, we may see a repricing of NZ rate hikes. The market currently prices in about 25bps of tightening over the next 12 months.
- EURUSD fails to rise on firewall boost as political risks build; data to offset political negatives
EURUSD remains very much rangebound despite the increasing likelihood that the Eurogroup will agree tomorrow to allow the EFSF to initially run alongside the ESM (though 2012), combining the 440bn EFSF lending limit with the 500bn capacity of the ESM – although this would be reduced to a combined 700bn from 2013. If the plan gets approved, an immediate question is whether the remaining AAA-rated Eurozone sovereigns (Germany, Finland, Netherlands and Luxembourg) are at any risk of downgrade, although Moody’s reaffirmed Germany’s triple-A status only on Tuesday. Agreement to this increased firewall should provide further comfort to markets as French and Greek elections loom and as we head toward the IMF Spring meeting (late April) at which additional non-EZ contributions to the firewall via the IMF will be a major topic of discussion. But risks elsewhere are building, with a general strike in Spain today ahead of tomorrow’s budget, and as coalition budget talks run into trouble in Holland – and we continue to see EUR lower over the next few weeks. However there may be a little more support for EUR on the data front: while yesterday’s softer German CPI could potentially spark chatter of further ECB easing, data generally would have to deteriorate much more sharply to garner support for such a move. Eurozone Business and Consumer Confidence releases are unlikely to paint a weak picture; we expect a broad based improvement for the third month in a row albeit from low levels. Industrial Confidence is however back to its long-term average. Also, German unemployment is expected to remain at multi-decade lows and with close-torecord high vacancies, this may eventually translate into upward pressure on wages. If that is the case, then this month’s read on inflation may be a one-off, leaving the ECB to stay on the sidelines for now. In any event, the steady pace of improvement in the Eurozone data should lend support to EUR, offsetting some of the political negatives and ensuring the recent range remains intact for now.
- Swedish retail sales, US Jobless Claims and yet more Fedspeak on the calendar
Over the last five days, SEK has managed to outperform its G10 counterparts and today’s February retail sales numbers may provide yet another boost – especially against NOK. We expect an improvement of 0.3% m/m and 3%y/y vs. the previous month’s 0.1%m/m and 1.5%y/y. In the US, US jobless claims should continue to decline (our forecast is 350k) and may boost market expectations of a strong payrolls number next week. Also, Fed’s Lockhart (middle of the road) and two Fed arch-hawks Lacker and Plosser are scheduled to speak today. A market reaction is unlikely to be significant given Fed Chairman Bernanke’s recent dovish talk. In the meantime, month-end/quarter-end flows should still weigh on FX markets up until Friday especially amid ongoing low market volume.
BNP Paribas