- EURCHF collapses momentarily printing sub-1.2000
EURCHF came under some pressure initially following the Swiss CPI, however the move accelerated in the mid-morning session with 1.2030 giving way prompting a sharp decline to 1.1998 (as per RTRS) within seconds. The spot move lower recently corresponds to a widening of EZ peripheral spreads, the latter which is gaining some momentum but surely thin Easter markets are to blame. Looking ahead, we expect the SNB to defend against any challenging of the floor and EURCHF to hold above 1.20 and the EURCHF Call Spread trade ideas in last week’s weekly remain attractive in our view. Swiss CPI fell -1.0% y/y a little less than the -1.1% tipped. Meanwhile, today’s BoE meeting should be greeted with a yawn with the CB already having made it clear that more QE is off the table for now. Only a serious deterioration of the economic data would resurrect such talks; but recent strong upturns across all UK PMIs pushes argues against this. BoE minutes on 18 April will provide more colour.
- Theme of peripheral stress back to haunt EUR/Crosses
The past month has seen an over-riding focus on USD-crosses and the response to US yields, expectations of Fed QE3 and stronger US data. While we continue this to continue providing the USD with support in the weeks ahead, the theme of peripheral stress (which was not impacting EUR-crosses in recent weeks) is back with a bang. As highlighted in yesterday’s US daily, the risk was for the ECB statement/press-conference to reveal (1) continued concern over growth and/or (2) a more hawkish message on inflation/wages. We got both, and in the event the sell-off in EUR-crosses has intensified tracking widening in peripheral spreads, particularly for Spain. Yesterday’s weaker Spanish auctions provided a reminder that markets remain unconvinced of an end to peripheral stress. Both Spanish sovereign CDS and several Spanish bank CDS are back above levels seen before the first ECB LTRO (end-December). EUR-crosses remain vulnerable over the next few weeks especially keeping in mind event risks such as the French and Greek elections this month, not to forget the G20 meeting on April 20. Note the significant gap developing between the German-Spain 10Y spread and EURUSD (See chart). We reiterate our EURUSD forecast of 1.28 by end of Q2.
- Risk-USD correlation dependent on source of stresses
The correlation between risk and the USD remains somewhat ambiguous: Wednesday saw equity markets lower but a rally in the USD. Where risk-taking is spurred by positive US data, the USD can rally in tandem, with the JPY and the EUR taking the brunt of the moves as alternative funding currencies. But that does not mean that risk-off is necessarily USD-negative: where risk aversion is triggered by non-US factors (as was the case yesterday) then the USD can retain its safe haven status and rally in response – perhaps reflecting that while some shift in funding may have occurred, the majority of positions are still USD-funded. As such, Fed policy remains key; despite the FOMC minutes, our economists still believe that further easing is more likely than not: the Fed has said that above-trend growth will be needed to make a meaningful dent in the unemployment rate. Data – especially tomorrow’s NFP is key, with our economists maintaining a 200K forecast.
- Soft data unlikely to derail CAD; Like AUDCAD lower on any retracement
Consistently weak local labour market data has not dented CAD in recent months with the rally in oil prices and outperforming US data having made CAD a star performer YTD. Today we get March PMI (expected to slip back) and employment data. While the latter has been weak (6mma only 2.9k per month), we expect a slight bounce, but it is unlikely
to affect the employment outlook. We like using any data-inspired CAD setback to consider long CAD positions, particularly against AUD. Concerns over China coupled with increased market expectations of a cut from the RBA could leave AUD vulnerable, while BoC Governor Carney sounded more optimistic on the growth picture earlier this week.
BNP Paribas