Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.
Goldman Sachs: What Matters in FX This Week : FX Week Ahead: Focus On US Growth Data And Oil Price Trends
It has been a big week for FX; a number of global and local influences have caused significant moves in key crosses and mostly in G10 space. First, the EUR rallied on a trade weighted basis; stretched short EUR positions unwound as progress was made on the Greece PSI and as the market took relief in the avoidance of a more disorderly outcome in the Euro-area. Interestingly the EUR rally happened even despite rangebound performance for risky assets and lack of strong directionality in other dollar crosses (such as $/LATAM or $/NJA). The key event to watch in the week ahead in terms of Euro-area tensions will be the EU summit on Thursday and Friday where the final details of the next Greece assistance package will be discussed.
Second, the JPY continued to depreciate sharply, extending the move that began with the BOJ’s latest balance sheet expansion operation and the shift to an inflation target. As Fiona Lake recently argued, although the shift in JPY fits fundamentally with a convergence towards fair value, the timing of the move is tricky and we have been reluctant to follow the shift particularly in the absence of an analogous move in US front end rates.
That said, the main macro development last week, the ongoing rise in Brent crude oil prices to the highest USD denominated level since last spring (and the highest EUR denominated level ever), was conducive to a shift higher in both in EUR/$ as well as in $/JPY. Our commodity strategy team has been highlighting that the run up in Brent prices over the past month has been driven primarily by a recovery in global growth expectations and hence was in line with our broader views. However, in the past couple of weeks fears of supply disruptions due to Middle East tensions has likely contributed to the increase to over $124/bbl as well. Our relevant top trade hit our target and we recommended clients to close the long July 2012 Brent position. However, we still expect to see Brent crude oil prices to rise to $127.50/bbl on a 12-month horizon, and see the risk to this forecast as increasingly skewed to the upside. For now, however, we expect the better opportunity for a long position in crude oil lies in being long WTI crude oil, and we have recommended a long September 2012 WTI position to take advantage of our anticipated narrowing of the WTI-Brent spread following the reversal of the Seaway pipeline to flow crude oil from the oversupplied US midcontinent to the US Gulf Coast in June.
What this means for FX is 1) currencies like NOK and RUB tend to experience the most positive Terms of Trade shock, while JPY and KRW the most negative one and 2) reserve recirculation dynamics imply EUR/$ buying flows from large commodity producing FX targeting countries.
Finally, more dovish than anticipated BOE minutes led to GBP weakness which we think can extend. Policy expectations in the UK, combined with EUR dynamics and developments in oil prices are bound to lead GBP/NOK lower; hence our new trading recommendation last week.
For the week ahead we will be watching US data closely. Risky assets will need to see the improvement in growth dynamics extend in order for the rally to gain fresh momentum. ISM will be the key release to watch but durable goods and consumer confidence will also be important.
Monday, 27th February
US Pending Home Sales (Jan): Consensus expects 1.0%mom after a 3.5% fall in December.
Israel Monetary Policy Meeting : We and consensus expect no change from 2.50%.
Also Interesting: ECB Asmussen Speech
Tuesday, 28th February
US Durable Goods Orders (Jan): Consensus expects -1.0% mom after 3.0% mom in December.
US Consumer Confidence (Feb): Consensus expects a rise to 63.0 from 61.1 in January.
Hungary Monetary Policy Meeting: We and consensus expect the base-rate to be unchanged at 7.00%
Also Interesting: South Africa Q4 GDP, Philippines Jan exports, Japan retail sales
Wednesday, 29th February
India 2011 Q4 GDP: We expect 6.5%yoy vs consensus of 6.3% yoy after 6.9% yoy in Q3.
Sweden Q4 GDP: We expect 2.8% yoy growth down from 4.6% yoy in Q3 2011.
Euro area CPI (Jan): For core CPI, consensus expects 1.7%yoy after 1.6% yoy in December.
Bernanke Speech (semi annual testimony)
Also Interesting: Fed Beige Book, US GDP Q4 (2nd), Australia/Germany Retail Sales (Jan), South Korea/Japan Jan IP, Thailand Jan Exports, UK Feb Consumer confidence, Switzerland KOF
Thursday, 1st March
South Korea Exports (Feb): Consensus expects 13.7% yoy after -7.0% yoy in January.
China PMI Manufacturing (Feb): Consensus expects 50.8 up from 50.5 in January.
Germany Flash CPI (Feb): Consensus expects 2.2% yoy after 2.1% yoy in January.
US ISM/Global PMI: For ISM, consensus expects a reading of 54.5 in February up from 54.1 in January.
US Personal Income (Jan): Consensus expects 0.4% mom, the same as in December.
Switzerland GDP (Q4): We expect 0.3% yoy vs consensus of 1.0% yoy, down from 1.3% yoy in Q3 2011.
Philippines Central Bank Meeting: We expect the policy rate to be unchanged. Consensus expects a cut of 25bps to 4.00% down from 4.25%.
Russia CB Meeting: We expect no change in the policy rate.
EU Summit begins
Also interesting: Brazil Exports, South Korea/Indonesia/Thailand CPI, Poland Q4 GDP
Friday, 2nd March
Canada GDP (Q4): We expect 2.1% yoy up from 2.0% in Q3 2011.
EU Summit ends
And a tabular summary from SocGen: