Submitted by Shant Movsesian and Rajan Dhall MSTA fxdailyterminal.com
Late Friday we got the news that the Senate failed to get the votes to put a funding gap in place, leading to the government shut down which started at modnight on Jan. 20. We expect when Asia markets open up on Sunday night, we will get a knee-jerk hit on the USD, but whether this will have a material impact on the rest of the week will be defined by sentiment on the Treasury market, which has prompted the latest leg lower in the greenback.
Fears of demand out of China and Japan have been instrumental in the pick up in yields, which have been followed up in the rest of the major bond markets, with 10yr Bunds pulled up to 57.5bps while Gilts now stand at 134bps. The US 10yr Note reached 2.66%, but a large chunk of this is down to anticipated selling interest ahead.
We feel this may be a little overdone, based on the premise that both China and Japan will not feel comfortable with any significant appreciation in the CNH or JPY. Any communication from the respective central banks on reserve ratios will have to be measured at the very least, with China already citing misinformation in the reports that they may trim or halt purchases from hereon out. The BoJ will also continue to communicate their intent on maintaining their current program, with the markets now pre-empting normalisation which was something we were watching from the end of last year. The ECB know all about taper tantrums, and it looks as though the BoJ could be the next target, but this will impact across the spectrum of currencies, where the likes of EUR/JPY and GBP/JPY could be a little vulnerable.
This does not preclude lower levels in USD/JPY, where 110.00 is proving to be near term support point, but currency markets are hungry for any notable themes, irrespective of whether they may be premature or not. We have seen this play through in EUR/USD, with the prospect of signalling an end to the QE program setting off strong gains here which has taken out 1.2300, but with little follow through. Repeated attempts to reinstate upside momentum have failed, but pre 1.2150 and sub 1.2100 look likely to attract dip buyer unless we get some solid recognition that the USD is oversold in the near term at least.
Over the weekend, the SPD in Germany voted on whether to enter into talks with Merkel’s CDU, but the fact that the German government is in limbo, does not seem to be hurting the single currency to any degree, with the cross rates relatively well supported. We have already noted EUR/USD and EUR/JPY at better levels, but we are also watching EUR/GBP fight against the recent recovery of the Pound, with bids coming in here ahead of 0.8800. We can assume is well cushioned with the SNB making no secret of their view on exchange rate levels and their intentions on containing excessive gains but we have now gone past that, with the psychological 1.2000 looming over the horizon.
In recent weeks we have seen a discernible disregard for data, which tends to materialise when trends look to be in place – the current one clearly skewed against the USD despite a pick up in core inflation seen a little over a week ago. This Friday we get the second reading of US Q4 GDP, which is expected to come in around 3.0% vs the initial reading of 3.2%. Little over notable interest up until this point, with Dec durable goods also out at the end of the week.
Thursday’s ECB meeting is the highlight in Europe, but having sounded out concerns over exchange rate levels, we expect little change to their rhetoric which will keep QE open ended despite widespread belief that this will come to an end when the current program runs its course at the end of Sep. The central bank will be banking on the Fed to maintain their purported rate hiking cycle in hope that this will take the heat out of the EUR as speculators hang on the governing council’s wording. Data-wise, the PMIs should remain strong in the larger member states, with Germany’s ZEW and IFO at either end of the week again highlighting the out-performance in the economy despite political issues potentially weighing on sentiment further down the line – coalition hopes eroded with time.
The BoJ also meet next week, but as already covered above, no changes to their current monetary policy stance is expected. Any hint of discussion on normalisation would set off markets, one would expect members to be wary of this. On the same day we get trade data out of Japan, but the inflation stats on Thursday will be more of interest – to the central bank at least.
Last Friday saw the first piece of outright negative data in the UK as Dec retail sales dropped off sharply – consumers having taken full advantage of the Black Friday theme which has gathered momentum in recent years. Mixed surveys from the various retail consortiums did not prepare the marker for such a weak figure, but spending levels on credit cards – as reported by Visa – were a worrying sign, which has not been reflected in the latest data. Higher inflation leading to a drop in real wages will naturally impact at some stage, but the UK has bigger concerns as the latest rhetoric out of Europe – French president Macron over the weekend – reminding everyone that single market access for UK banks will come at a cost.
As such, we should start to see Brexit optimism starting to fade, especially with Cable coming up ahead of a psychological in 1.4000, but in truth, we are surprised the pair has risen this far, but naturally, USD weakness has been a key factor. EUR/GBP is still relatively well contained, and despite GBP trying to come out on top in recent weeks, there has been little give south of 0.8800.
UK data points of note are the public borrowing requirements on Tuesday but greater onus on the jobs report Wednesday and Q1 GDP on Friday. BoE’s Carney is also due to speak at the end of the week, but we expect him to be a little less insistent on UK rates as his colleague Saunders was last week.
Trade talks between the US, Canada and Mexico are also strained with the prospects of a NAFTA collapse heightened given the lack of perceived compromise on the part of the US. President Trump has been blowing hot and cold on his approach to the talks, and within the Canadian camp, hopes for an amenable renegotiation are not exactly high, which is starting to lean on the CAD. As BoC governor Poloz stated last week, an outright collapse would be net negative for the US and Canada in equal measure; this based on the commensurate benefits to both nations over the last 24 years.
Amid USD weakness last week, USD/CAD was pretty resistant to the downside despite another 25bps added on to Canada’s overnight rate, with the market taking heed of the future path on policy as the accompanying statement was a little more cautious this time around. NAFTA was the key factor in (BoC) warranting restraint from here. 1.2360 looks to be the near term line in the sand on the downside, with 1.2500 looking vulnerable up top despite sellers coming in hard above here last week. CPI data due out at the end of the week.
AUD and NZD have been enjoying the rise off the back of the negative sentiment on the USD, but the former is now struggling for traction above 0.8000 while NZD resistance into 0.7340-50 is proving tough also. Both spot rates are in over-bought territory on the daily metrics, but we saw little positive reaction to the better than expected Australian employment stats in the middle of last week, so we expect weakness here as with the NZD should the greenback retrace a little. Looking at the limited traction ahead of 1.1000 in AUD/NZD, price action here reflects a concurrent rate path at the RBA and RBNZ, so unless there is something to suggest otherwise, the range here will be limited as a result. New Zealand CPI next week is expected to stay just below the 2.0% mark.
The Riksbank in Sweden has been a little more committal on shifting its stance from neutral to hawkish, but rates here remain in negative territory, so they certainly have room for manoeuvre. However it is the Norges bank who meet next week, but no change expected here, and this could be enough to return the NOK/SEK rate back towards parity again but a host of Swedish data including manufacturing confidence, unemployment and trade could add some flavour to USD/SEK in particular, which is looking to base out ahead of 8.0000.
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