- FX markets stuck in ranges as vols continue to edge lower – despite stress signals elsewhere
The lack of conviction in FX markets continues to frustrate, with moves seemingly confined to clearing out short-term stops. The inability to break out of recent ranges was nicely illustrated yesterday by the lack of reaction in EURUSD to a relatively successful Spanish auction; and then the relatively shallow dip as rumours of a French downgrade hit the markets – later discounted. The over-supply of option gamma goes some way to explaining the stickiness: private banks continue to sell short-dated volatility, while demand has failed to keep pace on dwindling interest from leveraged names. But the low level of FX vols appears at odds with many other indicators of financial market stresses: credit spreads, basis swaps and equity volatility all suggest that FX volatility should be much higher, suggesting that a breakout from the recent ranges and the associated localised gamma should see vols move durably higher. As ever though the question is one of timing, and today looks unlikely to be that day. There is specific EUR data interest in the latest German IFO survey, where we look for a slightly greater deterioration than the consensus forecast in each of the Business Climate, Current Conditions and Expectations readings (see calendar below). But with little else of importance on the data calendar, comments emanating from the IMF meetings are likely to provide the broader cues for markets. We suspect that any remaining euphoria, should IMF MD Christine Lagarde be able to trumpet that new IMF commitments are now within the EUR400-500bn targeted range, will prove short lived. French and Greek elections may be the dominant force on Eurozone markets and the Euro come next week (and following the outcome of the first round of voting in the French Presidential elections on Sunday). Latest polls indicate Hollande and Sarkozy are close together for the first round of voting but Hollande still commanding a near 10-point poll lead for the second round on May 6. Key early next week and as we head towards the May ECB meeting will be the ‘flash’ EZ PMIs (due Monday). We continue to look for EURUSD slippage in coming days and weeks – note that the Eurostoxx Bank Index seems to have resumed its slide – and if weaker data revives thoughts about additional ECB easing, this would certainly help the cause of this call.
- GBP does best as BoE’s Posen’s views resonate
GBP was Thursday’s best performing currency, with relatively hawkish comments from BoE MPC arch-dove Adam Posen helping to cement the view that the Bank is done easing. This is gratifying in the context of our strategic short EURGBP view articulated in the latest edition of our FX Weekly, though we were also looking to a possible contraction in Q1 GDP to be reported next week as potentially offering better entry levels. However, on the GDP release, the Bank has been busily downplaying the significance of a negative print; Posen on Thursday told reporters that ‘the UK economy is stronger than ONS data will show’. If UK Retail sales today support that notion then sterling will gain some additional momentum.
- CAD underperforms – but should out-perform from here; CPI key today
Less gratifying on Thursday was to see CAD as the poorest performer in G10, and where a combination of slightly softer oil and equity prices may have offered a pretext for a dose of profit taking on some established CAD longs. We look for significant out-performance by CAD in coming weeks against NZD in particular and quite probably, AUD too, as the RBA heads into easing mode in the absence of a CPI shocker next Tuesday. Today’s Canadian CPI data will be important in this regard. Any upside surprise from the consensus expectations for headline CPI to rise by 0.5% MoM (2.0% YoY, the middle of the BoC target range) or in the Bank of Canada’s core CPI measure (consensus +0.3%, 1.9% YoY) would add a layer of conviction (currently lacking) to the view that the central bank is seriously contemplating raising rates anytime soon.
BNP Paribas