- FX Facts Fit The Figures
Thursday was something of a rarity in FX markets in that there was no need for journalistic licence in fitting facts to figures. Moves in most of the G10 currencies could credibly be attributed to idiosyncratic economic news. Thus, JPY was higher immediately after the February Japan trade balance printed much better than forecast, recording its first surplus after four months of deficits (lower Treasury yields later compounding USDJPY losses). AUD and other commodity currencies took a direct hit from the slump in the China HSBC Manufacturing PMI to 48.1 from 49.6 (and which would be consistent with a fall below 50 in the official PMI due on Sunday week). EUR was sold after French, German and then the pan-Eurozone PMIs unexpectedly fell and so cast some doubt on the recent evidence of economic stabilisation and which the ECB has been championing. CAD suffered from much weaker than expected retail sales data, and NZD earlier in the session from Q4 GDP that at +0.3% came in at only half the forecast growth rate. Outright USD strength through all this was however restrained by a fallback in Treasury yields, accompanied by a whiff of ‘risk-off’ in equities as the VIX rose 0.50 to 15.63 into the NY close. Asian markets overnight have been quiet in the extreme.
- Approach of month/quarter end could further muddy the FX waters
One factor cited behind the US asset market performance was the suggestion that US pensions funds running balanced (bond and equity) funds have a significant index rebalancing need into month and quarter end, given the scale of the equity market rally and bond market sell-off this quarter. The same logic might also means significant month end FX fixing flows (and which could become evident from next Wednesday, the last day of trade for regular FX settlement). If correct – although in our experience the flows and market volatility have rarely lived up to the hype – then there is a risk that support for Treasuries and weakness in equities will further muddy the waters in determining whether we have indeed moved into a new (for now) FX paradigm whereby risk sentiment and the dollar are positively correlated. What is also going to be important now is whether US data shows ongoing resilience in the face of disappointing economic news from Europe and Asia. Thursday’s US initial unemployment claims number at 348k keeps this hope alive and next week’s durable goods orders report is going to be particularly important in this regard. If the data does hold up, this could well prove dollar supportive (on the relative US out-performance argument) and if it does not, then there is risk of a broader correction in risk sentiment that might also support the dollar. This leaves us happy to be running long USD (and short EUR) exposure here, reflected in the latest edition of our latest FX Weekly – Buying the USD in which we established a short EURUSD position targeting 1.28. And, though our 1.15 end-2012 European digital was knocked out at 1.0350 on Thursday, we have re-established some long AUD exposure via a short EURAUD position.
- Fed speak reveals extremes, more due Friday
Fed speak is going to remain important, with St Louis Fed President Bullard to speak again during the Asian morning, chairman Bernanke to give the opening remarks at the two day Fed conference commencing Friday and Atlanta Fed president Lockhart due to speak in the Washington afternoon. Yesterday the contrasts in Fed views could not have been starker. Arch-hawk Richard Fisher opined that ‘we’ would not be doing more QE if the data held up as it has been, while Chicago Fed President Evans repeated his mantra for more accommodation now. Meanwhile the St Louis Fed’ Bullard – a non-voting moderate hawk – opined that the FOMC may be at a turning point on policy. It seems clear that the Fed call remains highly data dependent. There is limited data interest today, Italian retail sales and Canadian CPI arguably the highlights. After yesterday’s weak Canadian retail sales print maintained a string of weak activity numbers, a soft CPI report (well below 2.1% on the BoC’s core measure) could see BoC easing talk revisited to the detriment of CAD.
BNP Paribas