When was the last time we heard that strong USD is in the US best interests? Because… that is what, unlike Draghi, Trichet used a few years back to tame the EUR strength. This time is different: EURUSD at lower levels, has risen slower, and … with recent inflation and export data, strong USD is just not in the US best interests any more. Sorry.
Figure 1. This time is different
Words speak louder than action. Draghi managed, without even cutting rates last week, to make the peripheral yields fall around 10bps. A funny roundtrip for EURUSD: 6 pips from the target (1.40), and eventually 15 pips above to what I said to be my stop/loss last week (1.3730). Parameters unchanged, as the EURUSD is near the trend and 100D MA support. I would buy/rebuy EURUSD here, I think the markets have almost digested headlines on forecasts for rate cut prospect in June. And a cut – if it comes – won’t be a game changer, in my not so humble opinion.
Figure 2. Nearing trend support…
What would bring EURUSD down is worsening global growth picture, compromising European recovery. Not there yet. European industrial data was weak last weak, but it is volatile and not consistent with the better survey readings. Both China and US will have a better Q2. So far European indicators (M1, Chinese PMI new orders…) suggest a gradual softening, not a cliff, for growth data in months ahead. This week focus – European Q1 GDP data, likely to print 0.4% q/q, or 1.6% annualized (NB: faster than the 1% consensus for 2014 as a whole).
Forecast finetuning from the BoE this week: they will likely adjust near term inflation down, and for good reason: will likely stay under the 2% target in coming months, and GBP is already stronger than the BoE projected. Lower inflation means the BoE can relax – a hike in 2015 Q1, priced in, won’t materialize until we get higher wage growth in tune with BoE’s projections (still more than 1%pt away), another print this week. The BoE will likely note slack in the labor market not seen from unemployment rate. Carney will likely be grilled on the red hot housing, but I suspect some finger pointing to macroprudential policy, excuses that rate hikes is a „blunt tool“. Keep the EURGBP long (huge support around 0.8150), GBPSEK short (Swedish inflation this week – Riksbank July cut almost full in the price).
Figure 3. UK labour market – room for improvement
Under pressure to strengthen, the JPY, with both drivers diverged, with US Treasury yields and Japanese stocks grinding lower. We will likely get a strong Q1 GDP report this week (ahead of VAT hike), but all focus now is how deep is a slide in Q2 – and so far business survey indicators have been disappointing. Consumer confidence has fallen earlier, we get a new reading on this this week, likely low again (inflation no good!). Disappointing macro data undermines confidence in Abenomics, and puts JPY under strengthening pressure. But very short term the USDJPY has found support around 101.50 again, and potentially higher stocks this week will likely lift it slightly. But if 101.50 fails…it will go double digit in no time.
Figure 4. Less happy consumer – stronger JPY
China remains key disinflationary force globally, reconding a 2% y/y decline in PPI. Prospects of easing bias supports the Emerging Markets and commodity currencies. Keep the long AUDNZD, both tactical bet and trade of 2014. Contrast positive vibes from Australian labor market, vs less comforable RBNZ: more NZD strength compromises rate hikes priced in. It is not yet time to re-sell CAD, despite weaker labor market data last week (USDCAD toward 1.06 first?). And even RUB, the worst in the camp, could get some more support near term as shorts have hit record highs, despite some more bad news from Ukraine…when the wind is strong enough, even pigs can fly.
Nordea