The EURUSD and the US S&P 500 stock index divergence over the past few weeks…reminds of last year’s February – May epizode, where the markets traded under the theme „strong US macro = higher yields and stocks = strong USD“. Are we getting back there?
Figure 1. Divorce
Not so quick…the US macro cyclical data has been mixed over the past few weaks, with both some disappointments (e.g. home sales, NAHB housing market index, industrial production), but some improvements too (e.g. housing starts, building permits, Philly Fed). Not only the US macro is mixed, also elsewhere: while Chinese PMI was a positive surprise, the USDCNY still stuck at recent highs (weakness in housing worrying government?). The European service PMIs last week – a positive surprise (domestic demand!), but manufacturing…tapering. And the decoupling between global PMIs and trade growth data…hmmm.
Figure 2. Another divorce
So, not too good, not too bad…goldilocks environment continues for now: low volatility and volume, little conviction, carry on. Will be difficult to change this week, with holiday Monday and secondary macro data: US durable goodis and consumer confidence (expect both softer), some talk (notably, new voting Fed member Mester), EMU money and credit data.
The EURUSD, annoyingly, finished the week at just around the 200D MA, leaving hope for both. Parameters unchanged: test short below 1.3620, back long above 1.3730. Admittedly, the USD recent move looks strong across the board, judging from the charts alone. The DXY index has managed to climb above the multi-month resistance. Now the key test level, we are shy of, is 80.50 – above which the USD bulls can declare victory. (Short NZDUSD is my favourite, in that case, GBPUSD close second.)
Figure 3. Beware of a trap, bears
CHF has been interesting to observe in all that. To me, the USDCHF is a purest signal of USD broad trend. But this time around, the decoupling between USDJPY and USDCHF since the ECB meeting suggests to me: it is somewhat a CHF move, rather than just the USD move. Why? The expectations that the SNB will have to push back against any ECB easing action (FX intervention or rate cut) have grown. In any case, the USDCHF now faces stiff resistance – thus the broad USD rise.
Figure 4. Ain’t easy
And the ECB action is very much in the minds and prices now: EONIA 1y1y at 9.8 basis ponts (good luck with that one). Bloomberg survey, too: 90% expect action from ECB on 5th June, almost universal rate cut call. Difficult to see lower EUR rates here without a major shock to risk sentiment. And for those expecting a rate cut, a surprise „no cut“ but rather growth oriented action (like SME funding for lending) would actually bring rates higher.
Keep bias for weaker GBP: data still strong, there are signs that house price growth has peaked for now, and from the recent comments it seems new macroprudential measures are on the way. Ceteris paribus, that will allow the BoE to stay on hold for at least a quarter longer – hike rates later than currently priced in (2015 Q1). You can run, but you can’t hide, GBP.
Nordea