- SMP to the rescue? Italian auctions to test market’s renewed confidence
What went down on Tuesday went up on Wednesday, though only about half of Tuesday’s G10 FX moves were reversed. The turn-around was largely attributed to improved sentiment in European debt markets after comments from ECB Executive Board member Benoit Coeure saying that market conditions (in Spanish bonds) are not justified, reminding his audience that the Securities Market Programme (SMP) still exists. But while the SMP remains a option for the ECB, our economists caution that its use is likely to be constrained by internal opposition and fears of moral hazard. We see Eurozone stress as a likely persistent theme through Q2, weighing periodically on the EUR – and to a lesser extent, on risk currencies in general. The first test of yesterday’s improved sentiment is likely to be today’s Italian bond auctions, slated for 09:00GMT. Italy is auctioning 2015, 2020 and 2023 bonds, the latter two well beyond the 3-year maturity of the LTROs and so a real acid test of investor enthusiasm (other than local banks) for longer duration Italian paper. Poor results will immediately turn the spotlight on a planned Spanish bond auction next Thursday. Before then, evidence of whether the ECB has reactivated its SMP will be important, with Wednesday’s moves suggesting that a renewed ECB presence is now discounted. Should the ECB fail to show up before the weekend, EURUSD should be subject to fresh selling pressure.
- Swedish CPI important ahead of Riksbank next week; little yesterday from Fedspeak, little expected today
There was limited news flow of significance during the New York session. The Fed’s Beige book was reasonably positive (instances of the words ‘weak’, ‘weakness’, ‘weakening’ or ‘weakened’ fell to their lowest since April 2006). Incoming Fed rhetoric, from Lockhart and Bullard, admitted to some disappointment over last week’s payrolls report but both were quick to suggest not too much should be read into one month’s numbers and that they did not immediately make the case for more stimulus. Meanwhile Yellen was dovish as expected, saying the Fed remains willing to take whatever action is necessary. Today will bring comments from the Fed’s Lockhart and Kocherlakota, each for the second time this week so unlikely to be of much market interest, and arch-hawk Plosser. Other potential FX movers from the data calendar include SEK, on the March CPI data (and after chronically weak industrial production data earlier this week). It is a close call whether the Riskbank cuts rates next Thursday. On balance, we think they will but the CPI outcome will be important. UK and US trade numbers will be of interest (former given GBP’s recent strong run, latter more for how it feeds into Q1 GDP) and too weekly US claims data.
- Aussie employment super-strong, next up China data on Friday, CPI on 24th. We take profit on AUDNZD
Australian employment at +44k blew away consensus calls for a paltry +6.5k of additions; the unemployment rate held steady even as the participation rate jumped 0.2%. But the volatility of the numbers – extreme prints have often been quickly reversed the following month – has led to a diminished market response, and while AUDUSD rallied through resistance in the 1.0350-60 area, there was little follow-through. The data may complicate the RBA’s decision early next month, but only if inflation comes in the middle of the target 2-3% range: the RBA made it clear last week that it is likely to cut if inflation is benign on the 24th of this month. Still, even if CPI signals a cut, the stronger labour data makes subsequent cuts that much more unlikely; OIS markets are still pricing in a full 50bp of cuts over the next 3 meetings; and 88bp of cuts over the coming 12 months. Barring a much harder Chinese landing and/or significant Eurozone stress, this looks excessive. We retain our forecast for AUDUSD at 1.05 in Q2 (in line with our BNP STEER short-term fair-value estimate – see chart), and if tomorrow’s raft of Chinese data proves supportive, this target could be met sooner rather than later. Yesterday we took profit on our short AUDNZD position at 1.2580, a little ahead of our original 1.2500 target (position established at 1.29), prompted by technical factors and by the risk that incoming local and China news could support AUD.
BNP Paribas