- Risk-USD correlation dependent on source of stresses
The correlation between risk and the USD remains somewhat ambiguous: Wednesday saw equity markets lower but a rally in the USD. Where risk-taking is spurred by positive US data, the USD can rally in tandem, with the JPY and the EUR taking the brunt of the moves as alternative funding currencies. But that does not mean that risk-off is necessarily USDnegative: where risk aversion is triggered by non-US factors (as was the case yesterday) then the USD can retain its safe haven status and rally in response – perhaps reflecting that while some shift in funding may have occurred, the majority of positions are still USD-funded. As such, Fed policy remains key; despite the FOMC minutes, our economists still believe that further easing is more likely than not: the Fed has said that above-trend growth will be needed to make a meaningful dent in the unemployment rate. Data remains key, with none more important than tomorrow’s NFP. While Wednesday’s non-manufacturing ISM and the ADP report came in slightly below expectations, thus far, the data has been consistent with moderate growth in the economy; our economists have reiterated their 200k NFP forecast. That NFP release will come in an extremely illiquid holiday market, and some positioning squaring in advance may be inevitable later Thursday.
- Less dovish ECB fails to shift focus from peripheral yield sell off
The most unanticipated ECB meeting of the year revealed that the ECB was more confident that the worst is past for both the markets and the economy. It took on a less dovish direction than the previous meeting, noting that they are watching for second round effects on wages. Talk of an exit strategy may be premature even if wages are rising, but if German wages continue to pick up and credit growth to the private sector rises, then support among ECB Board Members for an exit strategy may gain momentum. Despite a less dovish statement, EUR weakened against all G10 currencies (barring AUD and SEK) as weaker Spanish auctions provided a reminder that markets remain unconvinced of an end to peripheral stress. Thus, with concerns over Spain peaking through and political risk ever more apparent with the upcoming French and Greek elections ahead, we reiterate our EURUSD forecast of 1.28 by end of Q2.
- Swiss CPI and BoE meeting on the calendar
EURCHF continues to drift lower, and with Eurozone peripheral concerns building, it may be just a matter of time before the market decides to test SNB’s resolve at the 1.2000 floor. Today’s CPI might accelerate that move if deflation is less severe than the -1.1% consensus (BNPP -1.2%), but with Switzerland falling further into deflation, we see little chance that the floor might be at risk. Nevertheless, with spot approaching such a critical juncture, the trend of lower implied volatility in EURCHF may have run its course. Meanwhile, the Bank of England meeting will be a non-event as the BoE has already made it clear that more QE is off the table for now. Only a serious deterioration of the economic data would resurrect such talks; and indeed the PMI Services Index on Wednesday pushes back the chance that the MPC could extend QE in May. In any case, we will have to wait until the BoE minutes on 18 April for more colour.
- Despite weak domestic Canadian data, we like AUDCAD lower
Consistently disappointing data out of Canada has failed to have a significant drag on CAD; in fact, CAD has outperformed most G10 currencies since the start of the year. The rally in oil prices and positive US data have overshadowed domestic developments. While employment data tends to be quite volatile, the 6-month average pace of employment is now running at a mere 2.9k per month – the economy added just 17.6k jobs in the last six months. We expect to see a slight bounce for March, but it is unlikely to affect the employment outlook. Nevertheless, we are positive on CAD particularly against AUD. Comments from BoC’s Carney this week verified that the BoC will remain on hold for some time and may be optimistic on the domestic economy given the improvement in the US economy. As for AUD, concerns over China coupled with increased market expectations of a cut from the RBA could leave AUD vulnerable.
BNP Paribas