Submitted by Shant Movsesian and Rajan Dhall MSTA from fxdailyterminal.com
FX Weekly Preview - liquidation risk likely to benefit USD this week
Last week we were looking for some moderation in the USD bearish view, and while this was (still is) a selective process, there is plenty on the calendar in the 5 days ahead which could see this more broad-based going forward. All conjecture at this point (always is really), but when we look at market exposure, it remains heavily biased against the greenback, with Euro zone growth and prospects continually cited as a firm backdrop for a higher EUR/USD rate, but on a longer term time frame.
There is plenty of volatility to manage in the meantime, and as well as a heavy schedule of data coming out of the US, we also have the German coalition vote within the Social Democratic party to look to, along with Italian election fever setting off the pollsters into a frenzy once again (04 March election day). On the latter, there is growing consensus that a majority will be hard to acheive - anywhere - the traction in the 5 Star Movement in the south jeopardising the centre right's chances of forming government.
Consequently, we have seen Italian bond spreads widening with Germany as a result of jitters now starting to filter through the market, and any extension of this will have some negative impact on the EUR, though we have seen this more through the crosses as the USD narrative remains overtly bearish. EUR/CHF is not faring too well at present, struggling to maintain a 1.1500 handle, and this could see a further set back which could take out the recent lows in the mid 1.1400's and then challenge 1.1300. As such, we maintain that there remains a strong probability that EUR/USD turns lower to test the 1.2160-1.2090 area, and (EUR) longs will be more vulnerable this week as any other.
From the USD perspective, the longer term outlook remains negative when considering the budget deficit predictions for next year. There is consensus that we reach $1trln by mid 2019, and now every spending plan announced by the Trump administration is treated with scepticism at the very least, unlike a year or so ago when the mere hint of such plans sent the USD on a fresh ramp higher. We get numbers on the other side of the twin deficit story, with the Jan trade balance reported on Tuesday, and the market is looking for a further widening out to $72.3bln vs $71.6bln as of Dec. Durable goods for Jan are also out at this time, and on Wednesday we get the second reading for Q4 GDP along with PCE (core).
Later in the day however, we get one of the key events of the week when the new Fed chair Powell addresses Congress, setting out his approach to monetary policy which looks highly likely to stick to the plan of gradual rate increases through the year. There was emphasis on the addition of the word 'further' (gradual increases) to the Fed minutes last week, and naturally, 'analytical momentum' (as I like to call it) has led to a growing view that the Fed will hike 4 times this year. We feel it rather underpins 3, with the first coming in March, which is now all but priced in. Not that this is doing the long end much harm, and those pointing to yield curve flattening as part of the negative USD bias will have to 're-evaluate'.
Onto Thursday and we get PCE prices for Jan as well as the ISM manufacturing PMIs which are a good indicator on the headline non farm payrolls number. The Feb labour report is not out until the following Friday, with the US holiday last week pushing the release out to the second Friday for March.
Out of Europe, apart from the flash EU CPI reading for Feb on Wednesday, we see little which can take the focus away from political matters, but persistent EUR strength could see the headline rate drop from 1.3% to 1.2%, but the impact will be limited if core holds on to 1% - as paltry as it is.
Nevertheless, the EUR has not been immune to the gains seen in the JPY, as the cross rate has worked through much of the demand seen in the mid 131.00's. JPY strength of late is part of a growing view that the BoJ will have to start considering exit, or more so tapering of the current asset buying program, an eventuality which has caused uncomfortable developments for the ECB given the excitement of when they will call an end to their QE. Not all the focus is on USD/JPY as a result, which looks to have found some near term support in the 105.50-106.00 area, though we sense this may be tested again. Based on our EUR view above, we see a push for a 130.00 test more likely than such an immediate resumption of the downside in the USD rate.
Last week we saw the Japanese inflation rate pushing up to 1.4% in a welcome development for policy makers, and as per comments from Kuroda in Davos a few weeks back, the deflationary mindset looks to be diminishing, though old habits die hard. Will the Japanese consumer starting spending more? It was a strong month in Dec with retail sales up 0.9%, and we get the Jan figures on Tuesday to shed more light on whether inflationary pressures (if they are indeed influential) have any momentum. Industrial production data has been too volatile to offer a viable metric on the economy, so Wednesday's construction orders for Jan and capital spending in Q4 are a little more insightful.
As for the correlation with stocks, it was another strong close on Wall Street on Friday, so we may get some weakness in the Asia session at the start of the week, though this correlations has weakened to some degree, but not vanished. Fed chair Powell's address midweek could see some volatility in US equities given his leadership is still a relative uncertainty, but most expect there to be some form of implicit rhetoric which suggests the 'Fed put' is still lingering in the background.
Levels to watch in the JPY pairs to the upside in this respect lie at 133.15 in EUR/JPY and 108.20-30 for the USD pair, with these two set to fight it out for the most part of the week.
Caixin manufacturing and services PMIs are also out this week, but tend to have limited impact on stocks, more so commodities, which have seen a relief rally in the past week of so as a function of continued weakness. The AUD has been cushioned on the downside as a result, recouping ground against its NZD counterpart as the cross rate held the mid 1.0600's in the early part of last week. Few can explain the relative out-performance in NZD at the present time, though some of the domestic data has been supportive, notably consumption through Q4 of last year. Inflation levels have dropped off though, and the RBNZ are ever mindful of economic shocks, while survey reports suggest the business community are still out in the cold on where (and how far) the current coalition government policy skew is directed.
Trade numbers out in NZ this week, and we expect any weakness to have more of an impact on NZD, with a USD recovery likely to be reflected in a slow grind lower towards the mid 0.7100's, while we still see AUD/USD eventually testing into the 0.7650-0.7750 support zone before we can feel comfortable that we have a platform to stage the next up-turn as the longer term charts suggest. The Antipodean currencies have been trading very tight ranges of late, so there seems to be little material focus here, and the COT data also reflects this.
The CAD attracts more of the interest as the NAFTA talks in the background suggest a greater degree of volatility ahead. This has been superseded (in the near term at least) by the level of Canadian Oil prices, which are still trading at a marked discount to WTI, which has come off better levels on its own account. This will detract from the growth figures going forward, and the added concerns in the Jan employment report where there was a shift from full to part time jobs also warrants a cautious approach from the BoC going forward. Just like the RBA and RBNZ, rate hike predictions have been reined in for 2018, but where the above 2 are seen on hold until 2019, the markets are still pricing in another move from the BoC, down from the total 3 moves in consensus at the start of the year. Nb, Canadian jobs number also out on 9 March.
USD/CAD snapped lower in its response to the inflation numbers, which still dropped in the headline, but coming in at 1.7% vs 1.5% expected, the algo sent the pair lower to test (and identify) bids ahead of 1.2600. Whether this level can hold is down to the broader USD narrative, but having topped out in the mid 1.2700's, key resistance in the 1.2900-1.3000 will have deterred significant upside last week in any case. Dec and Q4 GDP out on Friday, where the annualised growth rate is expected to tick up from 1.7% seen in Q3.
For the UK (and the Pound), negotiations with the EU are back in focus, with talks set to resume, but not before the UK set out its intentions of what it hopes to achieve in the negotiations. Judging from the EU response to the media reports on this, Brussels are not likely to share the optimism of the Brexit committee, who are perhaps happier to find common ground between the hard-liners and 'Remainers'.The EU's Tusk has been open with his opinion that there plans are based on 'illusion', with accusations of 'cherry picking' once again levelled at the UK approach. It is enough to say that we are still some way off getting close to an agreement, on which the transitional period is much dependant, so as we have maintained throughout our previews, we are looking for this optimism reflected through higher GBP levels to fizzle out.
Cable may well have hit a near term higher in the mid 1.4300's, with the subsequent retest well contained in the upper 1.4200's in the week after. There is room for another push above 1.4000, but sellers seem a little more comfortable fading moves above here with the domestic data also tailing off. The BoE seem convinced that conditions warrant further rate hikes, where the May meeting is now pencilled in for a move. For us we see little less risk in falling behind the curve at the present time, with the revised growth figures last week highlighting flat investment over Q4, and retail sales failing to show the rebound expected in Jan after the dismal figures in Dec. On the plus side, the public finances have improved over the month, but this down to strong self assessment tax receipts which were in fact a little higher this time last year.
Back to the market and short end rates are getting paid up, but some curve flattening to note here, and this also highlights some apprehension over the near term rate path espoused by the MPC. Take the Riksbank in Sweden are more than ready to delay rate move given the challenging economic headwinds, not least of all sluggish inflation, but at -0.50% they are in no hurry to reverse levels. UK inflation is expected to top out soon, and given exchange rate fed gains pass through eventually, growth prospects (which are set to lag Europe and the US) will drag on current GBP strength at least.
Under the circumstances, fading the topside in GBP may offer better dividends but clearly this is proving tough in EUR/GBP, which is still being pressured into the 0.8920-25. The mid 0.8700's are expected to see demand containing the pair, but this will be challenged in the week ahead Longer term, if the EUR is to outperform as many expect it to, then 0.9000+ is just a matter of time.
Swedish GDP and consumption data are out on Wednesday, and as we saw last week, there was a pronounced hit on the SEK when the central bank minutes revealed that there is a low chance of a hike in May, preceded by the fall in Jan inflation of 0.8% which brought the annualised rate in to 1.6%. NOK/SEK has now broken back above 1.0350-60, tipping 1.0400, while concurrent losses have pushed EUR/SEK through 10.0000 again while USD/SEK may challenge the 8.40-8.50 area later this week.
EUR/NOK looks a little more bearish on the weekly charts, so perhaps the SEK cross rate will attract fresh demands with the resistance levels noted above now breached. Norwegian retail sales the only notable release on the calendar.