FX Volatility Spikes As More Countries Enter Currency Wars; Euro Surges On Furious Squeeze After Touching 1.04

The global currency wars are getting ever more violent, following yesterday's unexpected entry of Thailand and South Korea, whose central banks were #23 and #24 to ease monetary conditions in 2015, confirming the threat of a global USD margin call is clear and present (see "The Global Dollar Funding Shortage Is Back With A Vengeance And "This Time It's Different"). But the one currency everyone continues to watch is the Euro, which the closer it gets to parity with the USD, the more volatile it becomes, and moments after touching a 1.04-handle coupled with the DXY rising above 100 for the first time in 12 years, the EURUSD saw a huge short squeeze which sent it nearly 150 pips higher to 1.0643, before the selling resumed.

Indeed, FX markets have been the main source of focus so far with once again the USD-index being the main source of price action. Overnight, the USD posted a fresh 12yr high after briefly breaking above the key 100.00 level, sending EUR/USD below 1.0500 for the first time since Jan’03. However, heading into the European open and a failed sustained break of 100.00 for the USD-index, the USD saw a bout of weakness which subsequently provided a lift to its major counterparts with EUR/USD and GBP/USD temporarily breaking back above 1.0600 and 1.5000 respectively, with RANsquawk sources noting Asian buyers in EUR/USD. One wonders if the BOJ is now also intervening on behalf of the ECB when things gets serious. However, this momentum for EUR/USD failed to sustain at the USD-index pared some of its initial losses, while GBP remained at its highs after the latest UK trade balance report showed a narrower deficit than expected. Elsewhere, NZD has held onto its gains after the RBNZ struck a less-dovish than expected tone, after leaving rates unchanged at 3.5%, as expected.

And since the ECB is all anyone can talk about these days, it is worth noting that the central bank bought €9.8 billion in eurozone bonds in the first  according to Benoit Coeure. "We have already bought 9.8 billion euros in bonds in three days'' Coeure said at a symposium in Paris. He said the ECB was on “precisely the right path'' to attain its objective of buying 60 billion euros of eurozone government and corporate bonds a month. Coeure said the average maturity of the debt was close to nine years, which he called “very long'' and which he said should “reinforce the economic effect of the intervention'' by the central bank as the ECB's injection of funds into the eurozone economy would last longer.

So if under €9 billion in ECB purchases brought the 10Y Bund to a record low 0.20%, one wonders where another €993 or so billion will take it?

Looking at the US today, everyone's attention will be on retail sales which are expected to rebound after two disastrous months to 0.3% on the headline and 0.3% ex autos and gas.

Of course, if indeed the Commerce Dept does suggest a jump in retail sales, remember that it will be all in the seasonal adjustment. As BofA showed previously, February retail sales ex autos and gas were a disaster, and the worst since January 2014.

Looking at bond markets, the action is also once again entirely in Europe, where everything is naturally green (even Greece this time), with German 10Y under 0.20%, and Spain sliding under 1% for the first time ever.

In equity markets, Asian stocks rose after shrugging off a second consecutive negative Wall Street close as the greenback continued to protract further gains. Nikkei 225 (+1.4%) broke above 19,000 for the first time since 2000, with both the Hang Seng (+0.5%) and Shanghai Comp (+1.5%) trading higher, the latter lifted by financials. This was amid easing speculation following news of a proposed CNY 1trl debt swap between Chinese local governments and the MOF, which would be handled by direct bond purchases. Banks, the main group of creditors, will be able to treat the new bonds as lower-risk assets, reducing capital charges. JGBs rose following a well-received 5yr auction which drew the highest b/c since January, overlooking the strength in Japanese stocks.

European equities have seen a relatively directionless session so far after a mixed open with macro newsflow relatively. However, the FTSE 100 has seen a bout of outperformance following a rebound in commodity prices alongside the softer USD. Despite trading lower around the open, Bunds and USTs have pulled off their lows in recent trade with nothing new in the way of fundamental news, although ECB's Coeure announced that since the start of the QE programme EUR 9.8bln of assets have been purchased with an average maturity of 9 years.

28 out of 31 banks unconditionally passed the second round of Fed stress tests regarding their plans to return capital to shareholders. However, Santander’s (SAN SM) and Deutsche Bank’s (DBK GY) US units both failed the stress tests while Bank of America’s (BAC) capital returns were only conditionally approved and the bank must resubmit its capital plan by 30th September. (BBG)

The USD-index has also provided a bulk of the price action in the commodity complex with both energy and metals prices higher while commodity-specific newsflow is relatively scarce so far. However, should precious metal prices move lower, a negative close for spot gold today would mark a 9th consecutive drop; the longest losing streak for the yellow metal in 17yrs. Overnight, Dalian iron ore futures rose by around 1.5% amid expectations of a pick-up in Chinese steel demand after China’s Steel Sentiment Index rebounded to above the 50.0 benchmark level.

In summary: European shares trade mixed with the basic resources and oil & gas sectors outperforming and autos, tech underperforming.  Euro strengthens against dollar after earlier falling below $1.05 for first time since Jan. 2003. Bank of Korea unexpectedly cuts interest rate. China PBOC says likely to remove deposit rate ceiling this year. Spain’s Banco Sabadell in talks to acquire Britain’s TSB Group. The U.K. and Dutch markets are the best-performing larger bourses, Germany’s is the worst. The euro is stronger against the dollar. Spanish 10yr bond yields fall; Japanese yields decline. Commodities gain, with natural gas, corn underperforming and copper outperforming. U.S. jobless claims, continuing claims, Bloomberg  consumer comfort, monthly budget statement, retail sales, import price index, business inventories, household change in net worth,  due later.

Market Wrap

  • S&P 500 futures up 0.4% to 2047.2
  • Stoxx 600 up 0.3% to 396.7
  • US 10Yr yield down 3bps to 2.08%
  • German 10Yr yield down 1bps to 0.2%
  • MSCI Asia Pacific up 1.1% to 143.7
  • Gold spot up 0.3% to $1159.3/oz
  • Eurostoxx 50 -0.1%, FTSE 100 +0.9%, CAC 40 -0.1%, DAX -0.1%, IBEX +0.2%, FTSEMIB +0.2%, SMI -0.1%
  • Asian stocks rise with the Shanghai Composite outperforming and the Kospi underperforming.
  • MSCI Asia Pacific up 1.1% to 143.7; Nikkei 225 up 1.4%, Hang Seng up 0.3%, Kospi down 0.5%, Shanghai Composite up 1.8%, ASX up 1%, Sensex up 0.8%
  • Euro up 0.41% to $1.059
  • Dollar Index down 0.45% to 99.35
  • Italian 10Yr yield down 7bps to 1.06%
  • Spanish 10Yr yield down 9bps to 1.07%
  • French 10Yr yield down 3bps to 0.45%
  • S&P GSCI Index up 0.9% to 409
  • Brent Futures up 1.1% to $58.2/bbl, WTI Futures up 0.7% to $48.5/bbl
  • LME 3m Copper up 1.7% to $5826/MT
  • LME 3m Nickel up 1.5% to $13975/MT
  • Wheat futures up 0.7% to 502.3 USd/bu

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities are relatively mixed, while the FTSE outperforms as the weaker USD-index has supported commodity prices
  • 28 out of 31 banks unconditionally passed the second round of Fed stress tests regarding their plans to return capital to shareholders
  • Looking ahead, today sees the release of US retail sales and weekly jobs data with potential comments from ECB’s Noyer, Coeure and BoE Governor Carney
  • Treasuries gain, with long end extending rally seen after yesterday’s strong 10Y auction; 30Y bonds to be sold at today’s $13b reopening yield 2.650% in WI vs 2.56% award in February.
  • ECB’s Benoit Coeure says ECB has bought EU9.8b over three  days under QE program; average maturity is nine years
  • Removal of a cap on what banks can pay depositors over the benchmark rate is “very close,” PBOC Governor Zhou Xiaochuan said Thursday; central bank also guided some lenders to lower deposit rates on concern they had been increasing them too quickly, people with knowledge of matter said
  • China aggregate financing was 1.35t yuan ($215.5b) in Feb.,  according to the PBOC, above economists’ median estimate of 1t; new loans totaled 1.02t yuan, M2 money supply rose 12.5%
  • South Korea’s central bank cut its key interest rate to an all-time low to counter slowing inflation and a weak economic recovery, joining a global wave of monetary easing
  • New Zealand’s central bank refrained from saying it expects “further significant depreciation” in the currency and left borrowing costs at the highest in the developed world
  • Two officers were seriously injured in a shooting outside a police station in Ferguson, Missouri, during protests after the resignation of the city’s police chief
  • Sovereign 10Y yields lower. Asian stocks gain, European stocks mostly lower, U.S. equity-index futures mixed. Crude, gold and copper higher

US Event Calendar

  • 8:30am: Retail Sales, Feb., est. 0.3% (prior -0.8%)
    • Retail Sales Ex Auto, Feb., est. 0.5% (prior -0.9%)
    • Retail Sales Ex Auto and Gas, Feb., est. 0.3% (prior 0.2%)
    • Retail Sales Control Group, Feb., est. 0.4% (prior 0.1%)
  • 8:30am: Import Price Index m/m, Feb., est. 0.2% (prior -2.8%); Import Price Index y/y, Feb., est. -8.9% (prior -8%)
  • 8:30am: Initial Jobless Claims, March 7, est. 305k (prior 320k)
    • Continuing Claims, Feb. 28, est. 2.4m (prior 2.421m)
  • 9:45am: Bloomberg Consumer Comfort, March 8 (prior 43.5)
  • 10:00am: Business Inventories, Jan., est. 0.1% (prior 0.1%)
  • 12:00pm: Household Change in Net Worth, 4Q (prior -$141b)
  • 2:00pm: Monthly Budget Statement, Feb., -$191b (prior - $193.5b)
  • 11:00am: U.S. to announce plans for auction of 3M/6M bills, 10Y TIPS
  • 1:00pm: U.S. to sell $13b 30Y bonds in reopening

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DB's Jim Reid rounds out the overnight event recap

What an incredible financial world we live in. After only 3 days of an 18-month program, the ECB continue to shred through yields at an incredible rate in Europe leaving them at astonishingly low levels relative to anything seen through centuries of financial market data. Many people now think European yields can go even lower but many of these same people thought they'd go higher 6 or 12 months ago so one would caution against placing high convictions on anyone's forecasts for yields at the moment (including ours). However we do feel more comfortable that credit and peripherals continue to tighten than we do on say the direction of Bunds.

Fascinatingly after only 3 days of QE there is already chatter about whether the ECB might have to end their program early given the distortions and problems they're creating. However that would leave a huge credibility issue and one has to assume that the situation would need to get significantly more crazy before they changed tact. Overall one has to say there is no precedent for anything close to the current situation in history and that everyone is making it up as they go along, central banks, investors and us strategists. We don't mean that in a disparaging way but it just reflects the reality of the situation. I would love to hear from people if they think they have a high conviction view on Bunds over say 3-6 months.

Yesterday was clearly another day where European QE trades continued to perform as EURUSD dropped another 1.4% and 10yr bund yields dipped briefly below 0.2% before closing 3bps down at 0.2%. It was also a big day for European peripherals with 10yr yields in Italy, Spain and Portugal all down 9bps and 30yrs down 16-17bps.

European equities jumped back after falling on Tuesday with the Stoxx 600 up +1.5% led by a +2.2% return on the FTSE MIB, a +2.4% return on the CAC and an +2.7% return on the DAX. European credit also had a strong day, with iTraxx Main and Xover 1bp and 7bps tighter respectively. Trading in the US was more subdued with the S&P dipping -0.2% and CDX IG and HY marginally wider.

In terms of newsflow the day began with disappointing retail sales, IP and investment data out of China. In his comment on the releases our Chief China economist Zhiwei Zhang later wrote how these reads show a noticeable slowdown in economic activity, reflecting that fiscal slide has set in. The team reiterated their H1 GDP forecast of 6.8% YoY (vs 7.2% consensus) and their view that risks are growing of a mini hard landing this year as the policy stance remains tight despite weak growth.

It was a relatively quiet day for data elsewhere with the main news probably being the start of the latest round of talks between Greece and its creditors. As they kicked off we had news out of Greece that the country’s Justice Minister suggested that German property could be confiscated to pay for war reparations (Der Spiegel) with Greek PM Tsipras yesterday saying that the country was owed reparation money by the Germans (CNBC).

Although a light day for data, Friday's strong payroll still resonates and given the feeling at the moment that the Fed is building momentum towards a midyear rate hike, it’s interesting to see one Fed metric which isn’t quite on message. The Atlanta Fed’s "GDPNow" forecast, which attempts to provide a "nowcast" for GDP prior to its release has dropped materially for Q1 since mid- February from around 2.3% to 1.2% in the latest update last week. The biggest factors underlying this development has been the deterioration in the current ‘nowcast’ for residential investment’s positive contribution to growth and an increase in the negative contributions to growth being made by nonresidential structures investments and net exports. The worsening in the two investment reads seems related to some disappointing construction reads we’ve had so far this quarter out of the US (possibly weather related) as well and the worsening of net exports looks to be tied into the appreciation of the $ and a port shutdown on the west coast earlier in the quarter. Whilst these kind of nowcasts are prone to big revisions and are future data dependant, the low current level and its deterioration over the past month certainly points towards a risk of possible disappointment in the Q1 GDP growth release. Even if it is mostly weather related will the Fed have enough info to confidently decide the climate is suitable for a mid-year hike?

On the effects of US dollar appreciation on net exports and investment it was interesting to see in what was a broadly positive set of results from Duke University’s US CFO survey that there were growing concerns from respondents on dollar appreciation. Around two thirds of firms with at least 25% of their total sales overseas noted a negative effect from the dollar’s strength and around one fourth of these firms said they planned to reduce capital spending plans as a result.

After another day of impressive dollar strength, with the currency up materially and up another 1.4% against the euro alone and with EURUSD experiencing the biggest annual bear run since the formation of the single currency (down around 24% YoY, see Figure 1 in PDF) the question has to be not whether current FX moves will slow the US down but rather by how much.


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