UK Bank Strains Intensify As Key Sterling Spread Hits Four-Year High

Stress in the UK banking system has intensified since Britain’s vote to leave the European Union, with the premium banks charge to lend each other short-term sterling funds doubling to its highest level in four years.

The Libor-OIS spread is a gauge of banks’ willingness to lend to each other and is perhaps the most fundamental barometer of the banking system’s health. Its widening comes amid a sudden darkening of the outlook for Britain’s economy. Christopher Vecchio, Currency Strategist at DailyFX, highlights how the widening of spreads could spell warnings of broader financial stress in Reuters.

“We’re not right at the edge yet but recession odds are creeping up and the flattening yield curve speaks to that. It’s still early in the game, but a flattening yield curve for banks is bad as it erodes their net interest margins. An environment of falling long-term yields is going to put a lot of pressure on financials,”

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JPY Gains, AUD Falls as China Weakens Yuan

Ilya Spivak, Currency Strategist, at DailyFX, comments:

“China has triggered another sharp burst of risk aversion after devaluing the Yuan by over 0.5 percent at today’s daily fix, marking the largest downward revision since Augusts’ fateful readjustment.  The sentiment-linked Australian Dollar dropped alongside Asian share prices while the safety-linked Japanese Yen outperformed. Cycle-sensitive commodities including copper and crude oil fell while gold and silver traded higher. Chinese stocks were shut down for the day after hitting the limit-down threshold of 7 percent.

 “The consensus interpretation for the markets’ negative response is that Chinese devaluation speaks to a need for emergency stimulus expansion, which implies greater-than-expected malaise in the world’s second-largest economy. Weakening the currency can be seen as a form monetary stimulus however, so one might have expected markets to cheer Beijing’s actions. With that in mind, it seems as though price action reflects a reflexive response drawing surface-level parallels with Augusts’ panic selling rather than a sober evaluation of China’s actions on their fundamental merits.

 “Looking ahead, S&P 500 futures are pointing sharply lower, hinting that risk aversion is aiming to continue in the hours ahead. The economic calendar is relatively quiet, putting the spotlight on Fed-speak as the source of event risk du-jour. Comments from Richard Lacker and Charles Evans, Presidents of the Richmond and Chicago Fed branches respectively, are due to cross the wires.

 “The two policymakers represent the hawkish and dovish extremes of last years’ contingent of FOMC voters. Traders will look to their remarks for clues about the likely 2016 rate hike path. The central bank projected four 25bps increases last month while the markets continue to envision no more than two. Investors’ dovish lean skews volatility risk to the upside for the US Dollar in the event that cumulative commentary strikes a hawkish tone.”

Greek Deal Offers Little Lasting Support for EUR/USD

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“The lust around the announced agreement between Greece and her creditors has already started to wear off. EURUSD is back under $1.1100, after flirting with a break of $1.1200 on the initial reaction to the agreement. Developments on the charts suggest that markets are weary about the deal’s ability to help Greece right the course, and perhaps are rightly discounting the possibility that ‘this solution’ is the one that ends the cycle of mini-crises in the Euro-Zone.

 

“The heart of the issue in the Euro-Zone right now is that there isn’t a ‘federal level’ fiscal transfers system as constructed in the United States; the Euro-Zone isn’t a fiscal union. In the United States, when a state runs a deficit (like Mississippi or West Virginia), there is an automatic rebalancing with excess funds collected from surplus states (like New York or Minnesota). This is useful for situations like rising unemployment, when the government has to make additional outlays for things like unemployment benefits. The net-effect is a more integrated economy across states, with more homogenous rates of growth and inflation.

 

“On the other hand, in the Euro-Zone, these automatic stabilizers don’t exist. When a deficit country (like Greece) goes into a crisis, it must make political concessions to surplus countries (like Germany) in order to receive aid funds. This makes for a contentious process, ultimately creating an imbalance of power skewed towards the surplus countries. We’re seeing this now, with Germany essentially holding all the chips at Greece’s expense.

 

“While a fiscal union is still further down the road (if at all, ever; Germany doesn’t like the idea in the very near-term), the current proposals agreed upon by the Greek government and the Eurogroup should be enough to cool talk about a ‘Grexit,’ prevent the collapse of the Greek banking system, and afford Greece bride financing to pay its litany of repayments the next few weeks.

 

“Over the long-term, without a fiscal union in place (or efforts to move towards that integration), these types of budget crises are bound to come up in the future given the heterogeneity of economies across the Euro-Zone. Any solution given to Greece in the short-term would be like bringing a car to the mechanic and only getting the fluids and tires changed when in reality the entire transmission needs to replaced. Germany may have to compromise on a few of its fiscal ideologies if the notion of European integration is to move past the current crisis and survive in the future.”

 

USD Breakout Takes a Breather as FOMC Minutes Loom

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“The USDOLLAR Index had half of an impressive day yesterday, with the latter half of the day sapping a good deal of potential for an overall stellar performance. Curiously, the turnaround around in the gauge of greenback strength occurred when a non-indexed pair fell back. As we’ve been watching for several weeks, USDCAD has been the lynchpin for the entire USD-spectrum: when the pair hit channel resistance, all USD-pairs receded.

 

“When viewing the USDOLLAR Index in context of USDCAD, the charts reveal perhaps the best attitude traders could have with respect to the US Dollar in an environment with rising uncertainty: it may be too late to jump on the recent breakout (the risk/reward of getting long inside a channel top is poor); although if you’re already long, it might still be worth holding onto (prices in USDCAD and the USDOLLAR Index continue to treat the daily 3-EMA as near-term trend support).

 

“It seems like a good moment for a pause in recent technical developments anyway, with the June FOMC minutes due to be released later today. As strong as the US Dollar has been, it’s been on the heels of good, but not great, economic data (the June US labor market report comes to mind). The minutes were recorded when the FOMC was more concerned about US growth, and it would not be surprising to see the dovish sentiment that ultimately lowered the expected interest rate path (per the dot plot) revived when the minutes are released later today. Like the June FOMC meeting itself, any USD-related weakness may be a passing event, as short-term bullish momentum persists.”

 

Fed Meeting Minutes May Amplify China And Greece Fuelled Risk Aversion

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The Australian Dollar underperformed in overnight trade – falling as much as 1.1 percent on average against its leading counterparts – as turmoil in China and an ominous end to yesterday’s EU summit fueled risk aversion. The safety-linked Japanese Yen outperformed, rising as much as 0.6 percent against the majors.

 

“The MSCI Asia Pacific regional benchmark stock index plunged over 2 percent as Chinese shares plunged, yielding the worst performance since 2007 for the Shanghai Composite equities benchmark. The rout saw trading halted in 43 percent of China-listed shares. Meanwhile, EU officials took a hard line with Greece after the country rejected the terms of a funding deal proposed by its creditors at a referendum last weekend. Rhetoric following yesterday’s sit-down in Brussels suggested Athens has until an EU-wide summit on Sunday to change its tune or make so-called “Grexit” a near-eventuality.

 

“Looking ahead, the spotlight turns to the Federal Reserve as it publishes minutes from June’s FOMC meeting. While the central bank flattened its expected tightening trajectory (compared with the March assessment), officials continued to call for two rate hikes in 2015. This stands in stark contrast with the markets’ priced-in outlook, which sees Chair Yellen and company waiting until early 2016 to resume policy normalization.

 

“The situation echoes a similar one last year, when a dovish shift in investors’ bets following a soft first quarter was disappointed as the Fed continued to taper QE asset purchases and ended the program on schedule. If the Minutes document hints at a parallel scenario this time around, fears of imminent stimulus withdrawal may compound risk aversion. This will probably to weigh on sentiment-geared FX (such as the commodity bloc currencies) and fuel further strength in the US Dollar and Yen.”

 

Currency Markets Eyeing G7 Meeting with Greece Fears in Focus

 

Ilya Spivak, Currency Analyst, at DailyFX, comments:

 

“The markets oscillated in digestion mode overnight after yesterday’s breakneck volatility that saw the US Dollar rallying alongside the German Bund amid Greece-inspired risk aversion. European and US stock markets slumped while Greek bond yields and CDS rates pushed higher as markets returning from the long holiday weekend responded to ominous rhetoric revealed over the preceding 48 hours.

 

“Greek Interior Minister Nikos Voutsis told local TV station Mega that Athens will not make June’s payment to the IMF because the money “isn’t there to be given”. This was followed by comments from ESM head Klaus Regling the following day, who hinted that a missed payment to the IMF would impact the likelihood of a deal with EU lenders and potentially herald insolvency.

 

“Looking ahead, a quiet economic calendar in European and US trading hours is likely to keep this narrative at the forefront, particularly as G7 finance ministers and central bank chiefs begin a three-day meeting in Dresden. Greece is likely to feature prominently in the discussions, and traders will keep a close eye on headlines emerging from the sit-down for direction cues.”

 

US Dollar Looks to Industrial Production, University of Michigan Data to Drive Fed Bets

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The US Dollar corrected higher in overnight trade after sliding to a four-month low in the preceding session. The Australian and New Zealand Dollars underperformed in moves that appeared linked to deteriorating monetary policy expectations.

 

“Narrowing bond yield spreads pointed to the two currencies’ deteriorating return advantage relative to the greenback in the minds of investors. Meanwhile, OIS-based measures of the priced in 12-month RBA and RBNZ policy outlooks shifted downward. In the case of New Zealand, traders’ expectations are now the most dovish in over six years, leaning toward two interest cuts between now and this time next year.

 

“Looking ahead, a quiet economic calendar in European trading hours is likely to see markets looking ahead to US news-flow in the final hours of the trading week. April’s Industrial Production report and May’s preliminary University of Michigan Consumer Confidence gauge are on tap.

 

“US economic data has been stabilizing relative to consensus forecasts since late March following a period of steep weakening set off in January. If this year’s downturn proves to be as similar to last year’s first-quarter slump as it seems to be, expectations that the Federal Reserve may yet stick with its original timeline and raise rates mid-year could re-emerge.

 

“With that in mind, traders will monitor data outcomes closely for signs of recovery in the second quarter. Such evidence stands to boost the US unit. Alternatively, soft results reinforcing the recent dovish shift in FOMC policy expectations may encourage continued unwinding of long-USD exposure.”

 

Pound May Rise as BOE Inflation Report Rekindles Rate Hike Bets

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The preliminary set of first-quarter Eurozone GDP figures seems unlikely to generate lasting follow-through for the Euro considering the figures’ limited impact on the near-term ECB policy trajectory. Indeed, the central bank looks to be essentially on auto-pilot as it continues to implement its €60/billion a month QE effort.

 

 

“Meanwhile, April’s UK Jobless Claims data is likely to play second fiddle to the unveiling of the quarterly Bank of England Inflation Report. The document has become the premier vehicle for communicating the central bank’s intentions to the markets. The British Pound may rise if firming performance in the Eurozone – the UK’s top export market – inspires upbeat rhetoric and rekindles bets that Governor Mark Carney and company may yet raise rates in 2015.”

 

Aussie Dollar Makes Gains Overnight, Reducing Scope of RBA Rate Cuts

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The Australian Dollar outperformed in overnight trade, tracking an advance in Australia’s front-end bond yields amid seemingly firming RBA monetary policy expectations. Bets on higher borrowing costs were likewise telegraphed in the equities space, where financial shares led Australia’s benchmark S&P/ASX 200 stock index upward even as most Asian bourses traded lower.

 

 

“The upward shift in investors’ RBA outlook may reflect pre-positioning ahead of today’s announcement of Australia’s new federal budget, which is expected to mark a departure from a focus on austerity previously championed by Prime Minister Tony Abbott. The markets may have interpreted preference for a growth-focused fiscal policy as reducing scope for further easing on the monetary side of the equation.

 

 

“Looking ahead, UK Industrial Production figures lead the data docket in European trading hours. Output is expected post a 0.1 percent year-on-year increase in March, matching the 20-month low recorded in February. While a soft result may weigh on BOE rate hike bets, British Pound follow-through seems unlikely as traders await the central bank’s quarterly Inflation Report due on Wednesday.

 

 

“Later in the day, Fed-speak will enter the spotlight by way of scheduled commentary from New York and San Francisco Fed Presidents Bill Dudley and John Williams (respectively). Both  are current members of the rate-setting FOMC committee and tend to lean on the dovish side of the spectrum. Rhetoric hinting the Federal Reserve may move slower to issue its first post-QE rate hike could send the US Dollar lower.”

 

Yen Gains as Fed Fuels Risk Aversion, NZ Dollar Drops on RBNZ

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The Japanese Yen outperformed in overnight trade, adding as much as 0.5 percent. The move mirrored a sharp drop on Asian stock exchanges, pointing to haven flows as the driver propelling the safety-linked currency. The MSCI Asia Pacific regional benchmark equity index fell 0.5 percent in a move the news-wires attributed to the absence of overtly dovish rhetoric in the FOMC policy statement published earlier in the day.

 

“The New Zealand Dollar tumbled, falling as much as 1.1 percent on average against its leading counterparts, after the RBNZ monetary policy announcement. The central bank signalled interest rate hikes were off the table and hinted it was considering lowering borrowing costs instead. The markets are pricing in at least one 25bps reduction in the baseline lending rate over the coming 12 months.

 

“Looking ahead, the preliminary set of April’s Eurozone CPI figures are expected to show the year-on-year core inflation rate held at 0.6 percent, unchanged from the prior month. The result seems unlikely to meaningfully impact the Euro even in the event of a deviation from forecasts considering its limited impact on near-term ECB policy trends. The central bank appears essentially on auto-pilot as it proceeds with its €60 billion/month QE effort.”

 

Correlation Evaporated Between AUDUSD and S&P 500

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“While the S&P 500 index keeps pushing towards historical highs, the Australia Dollar has moved sideways against the US Dollar amid falling commodity prices, China’s slowdown, and the disappointing performance of the US economy in Q1’15. The distinct trends in the S&P500 index and AUDUSD have provoked the correlation to drop quickly to a near-zero level from +0.60 previously. As Australia continues to grow below the Reserve Bank of Australia’s forecast rate, many speculate that the RBA will cut the benchmark rate again in the short-term to help boost the economy. Although the Australian Dollar remains a major destination of FX carry traders, its diminishing interest rate makes it less appealing compared to other ‘risky’ assets, like the S&P 500 Index.”

 

Pound May Rise if 1Q GDP Data Rekindles 2015 Rate Hike Speculation

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“First-quarter UK GDP figures headline the economic calendar in European trading hours. The year-on-year growth rate is expected to slow to 2.6 percent, marking the weakest print since the fourth quarter of 2013.

 

“While UK economic data has under-performed relative to consensus forecasts since the beginning of the year, leading survey data points to accelerating manufacturing- and service-sector activity growth through March.

 

“If this proves to foreshadow an upbeat GDP print, the British Pound is likely to rise as traders reconsider the possibility of a 2015 BOE interest rate hike. As it stands, futures markets price in the onset of policy tightening in the first quarter of 2016.”

 

Euro to Look Past IFO Data, May Rise Amid Bets on Greek Funding Deal

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“Currency markets are likely to look past the release of Germany’s IFO Survey of business confidence. With the ECB seemingly on auto-pilot for the time being, the outcome is unlikely to produce a significant inflection point for near-term policy expectations.

 

“Instead, traders will focus on rhetoric emerging from a meeting of Eurozone finance ministers and central bankers due to begin in Riga. On-going negotiations between Greece and its EU/IMF creditors will be in the spotlight, with Athens to present the fourth revision of a reform package designed to unlock further bailout funding.

 

“Both sides of the Greek fiasco seem vested in a successful accord. EU and IMF officials want to avoid setting a precedent for a sovereign default within the Eurozone that potentially leads Greece out of the currency bloc. Meanwhile, Prime Minister Alexis Tsipras and company surely understand that disorderly redenomination will probably compound their country’s economic woes and may cost them their jobs.

 

“The markets seem to agree: Greek 5-year CDS spreads and benchmark 10-year bond yields turned sharply lower earlier in the week, pointing to ebbing tail risk ahead of the Riga sit-down. Indeed, with Greece running out of cash to stave off insolvency, officials on both sides no doubt feel a sense of urgency to hammer out a deal and may prove more pliable than previously.

 

“On balance, the announcement of an agreement that keeps Greece afloat – even if only in the near term – is likely to send the Euro higher as dissipating near-term default risk clears the way for profit-taking on elevated bets against the single currency. Indeed, the CFTC’s COT report puts net-speculative short positioning near the highest on record as of last week.”

 

 

Pound May Prove More Responsive Than Euro to Eurozone PMI Data

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The preliminary set of April’s Eurozone PMI figures headlines the economic calendar in European trading hours. The region-wide composite index is expected to show the pace of manufacturing- and service-sector activity growth continued to accelerate, hitting a new four-year high.

 

“The report may not generate a lasting response from the Euro with ECB policy seemingly on auto-pilot for now. A supportive outcome may boost the British Pound however amid hopes that firming growth on the Continent will have positive spillover via a pickup in demand for UK exports. That in turn may drive speculation of a relatively sooner BOE interest rate hike.”

 

British Pound May Rise as BOE Meeting Minutes Reboot Rate Hike Bets

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The release of minutes from April’s Bank of England policy meeting headlines the economic calendar in European hours. Leading survey data shows the UK began to re-accelerate in 2015 after a protracted slowdown starting in October 2013.

 

“The rebound followed a pickup in the Eurozone, which accounts for close to half of UK export demand. Improving conditions have spilled over into inflation expectations, with the 5-year breakeven rate at a four-month high after bottoming in mid-March.

 

“If all this translates into a hawkish tone shift in BOE rhetoric, the British Pound is likely to rise amid rebuilding rate hike speculation. As it stands, futures markets price in the first post-crisis increase in the benchmark lending rate in the first quarter of 2016.”

 

Crude Oil May Be Bottoming

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“Irrespective of the recent IEA report, crude oil has made a significant technical move: breaking above the $53.60/54.21 area. This zone served as support at the end of 2014 and solidified itself as resistance after numerous failed attempts throughout Q1’15. The recent break above through this zone opens the door for a potential broadening wedge bottoming pattern, which indicates the potential for a move into the low $60s over the coming weeks. Weak US economic data – even if it portends to global demand dropping – may prove bullish for crude if the US Dollar sells off further. USDCAD’s recent break below $1.2350 highlights this potential.”

 

Euro to Look Past German ZEW Data as Greece Worries Loom Large

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“Germany’s ZEW Survey of analyst confidence headlines the economic calendar in European trading hours. The forward-looking Expectations index is expected to rise to 55.3, putting sentiment at the highest level in 14 months. A rosy outcome seems unlikely to offer a meaningful lift to the Euro however considering its limited implications for near-term ECB monetary policy.

 

“The central bank seems to be on auto-pilot for the time being as it monitors the impact of its new €60/month QE effort. Looming Greece-linked event risk by way of the upcoming Eurozone finance ministers’ meeting may likewise discourage commitment to a directional bias from investors. In fact, scheduled commentary from Danièle Nouy, the President of the ECB’s Supervisory Council, may easily overshadow the ZEW report if she opts to opine on the ability of Eurozone banks to withstand turbulence from an adverse Greece scenario.”

 

EUR/USD Appeal Due to Covering Potential, Not Yield Prospects

 

Christopher Vecchio, Currency Strategist, at DailyFX, comments:

 

“With respect to the ECB meeting, President Mario Draghi has made it quite clear that market-borne talk of the QE program being tapered ahead of its projected September 2016 finale are premature at best, and misguided at worst. Before asset purchases cease, the ECB needs to see a stabilization in both actualized and expected inflation, which haven’t happened yet: core inflation resides at a mere +0.6% y/y; and the 5y5y inflation swaps closed the week at 1.693%, right at the four-week/20-day average of 1.678%. ‘Taper talk’ probably becomes more realistic once core inflation crosses the +1.2% y/y threshold, or if the 5y5y inflation swaps move above 1.800%.

 

“For now, the Euro remains a weak buy against a basket of its major counterparts due to its deflating yield appeal and further crystallization as a funding currency. The Euro has lost and continues to lose its appeal as a growth currency as the differential between the short-end and the long-end of the yield curve (in Germany the 2s10s spread fell to 0.347% on Friday from 0.638% on January 1) decreases; and its appeal as a funding currency increases as rates towards the long-end drop into negative territory (German yields out to 9-years are negative).

 

“The drop in sovereign yields decreases the demand for Euros. With nominal yields falling and inflation expectations holding stable (and even slightly rising), real returns on fixed income investments are decreasing; in turn, this fuels demand for higher yielding/riskier EUR-denominated assets like equities; or forces Euro-Zone-based investors to look outside the region for opportunity – which means capital needs to be converted from Euros into foreign currencies. This is the “portfolio balancing channel” effect that ECB President Mario Draghi has been discussing since the beginning of the year.

 

“The Euro’s appeal, therefore, is rooted in the oversized short position currently in the market, which at least in context of EURUSD, could help propel covering in the very near-term (as was seen again this past week). As of March 14, there were 212.3K net-short contracts held by speculators in the futures market, off from 215.3K a week earlier (and down from the 226.6K seen during the week ended March 31, 2015). Otherwise, market participants are viewing the drop in Euro-Zone yields as a sign that the ECB will keep rates for an extended period of time, well-beyond the projected September 2016 finish for its QE program: the Morgan Stanley ‘months to first rate hike’ index currently resides at 56.5, suggesting a December 2019 or January 2020 rate hike at the earliest.”

 

 

Pound to Look Past Claims Data, US Dollar Set Sights on CPI Report

 

Ilya Spivak, Currency Analyst, at DailyFX, comments:

 

“UK Jobless Claims data headlines the economic calendar in European hours. Expectations point to a 25.5k drop in applications for benefits. Such an outcome would fall broadly on-trend and so seems unlikely to generate a significant response from the British Pound in that it would do little to augment investors’ BOE policy outlook. Traders will likely have to wait for the release of minutes from the central bank’s April meeting next week for the next major inflection point on the domestic front.

 

“Later in the day, the spotlight shifts to the March set of US CPI figures. The core year-on-year inflation rate is expected to register at 1.7 percent, unchanged from the prior month. Traders will look to the outcome to inform continued speculation about the timing of the first post-QE Federal Reserve interest rate hike. A print north of expectations may weigh against the recent dovish shift in the priced-in outlook, offering a lifeline to the US Dollar after three days of aggressive losses. Leading survey data points to weakness on the pricing front however, warning that a soft result may keep the greenback under pressure into the week-end.”

 

ECB Press Conference Invites Minimal Volatility, Limited EUR/USD Range

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“The European Central Bank’s rate decision and press conference were notably quieter than meetings past, but that was to be expected with no change forecast in the main interest rate and interest rate corridor, and no change in the recently unveiled QE program. While the most exciting moment of the press conference came when a protestor interrupted President Draghi’s opening statement, FX markets were little impressed with the update on the state of affairs in the Euro-Zone.

 

“The comments that President Draghi issued were fairly predictable and rather bland: recent economic data has been improving, but it’s too early to declare the crisis over; the ECB will continue its QE program until there is a sustainable pickup in inflation back towards the +2% annual target; the ECB intends to fully complete its QE program through September 2016; and there is no concern over the scarcity of bonds available, so there won’t be a change in the main interest rates for the foreseeable future.

 

“Around the rate decision and press conference, EURUSD held around its opening level of $1.0595, reaching a high of $1.0618 and a low of $1.0582 during the period. While prices oscillated fairly quickly between these two levels, there was a notable lack of directional trade around the ECB commentary. The two prior ECB meetings produced EURUSD daily ranges of 334-pips and 127-pips, whereas today’s range was only 93-pips at the time this report was written.”

 

Euro May Rise if Draghi Hints ECB QE Could Be Cut Short

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“A monetary policy from the European Central Bank headlines the economic calendar in the hours ahead. Officials are locked into a QE effort with defined scope (€60/month in asset purchases through September 2016), so tangible news on the policy mix is unlikely. The press conference with ECB President Mario Draghi will have market-moving potential however.

 

“The Eurozone economy has shown some signs of life in recent months and the central bank chief will almost certainly have to field questions about the possibility that QE will be cut short if growth and inflation mend faster than expected. Rhetoric opening the door to such a possibility may be interpreted as a relative shift away from the ultra-dovish extreme on the policy outlook spectrum, boosting the Euro.”

 

EUR/USD Surges Back Above $1.0650 after March US Retail Sales Miss

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“After several weeks of disappointing US economic data (the Citi Economic Surprise Index started the day at -45.6), traders were seemingly hopeful that a strong consumption report for March would indicate that the weakness seen in economic reports could be attributed to inclement weather during the winter months. However, with the headline March retail sales figure coming in below expectations, traders have abruptly reversed the greenback’s recent rally, pressuring it to fresh weekly lows versus several of its major trading counterparts.

 

“The US 10-year Treasury note yield, which started the day at 1.927%, traded below 1.870% in the minutes after the report; declining interest rate differentials are weighing on the US Dollar.

 

“Following the data, EURUSD rallied from near-session lows of $1.0560 to as high as $1.0661 shortly thereafter. Broad US Dollar weakness was observed surrounding the print, with USDJPY hitting fresh session lows below ¥119.50 and GBPUSD rallying above $1.4760, up over 100-pips from its daily lows.”

 

US Dollar Losing Steam – Retail Sales and PPI data on Tap

 

David Rodriguez, Quantitative Strategist, at DailyFX, comments:

 

“The US Dollar trades near decade-plus highs versus the Euro, but a noteworthy drop in volatility prices makes a further Euro/US Dollar breakdown unlikely in the week ahead.

 

“Indeed volatility prices have pulled back noticeably on a clear ease in market tensions. The US Dollar may have lost a key fundamental driver in rising interest rate expectations, and it may take a material shift in market conditions to force a larger Greenback rally. To that end it will be important to watch tomorrow’s highly-anticipated US Advance Retail sales report as well as Producer Price Index inflation results as key clues on the Fed’s monetary policy. A meaningful disappointment could be enough to force a US Dollar sell-off.”

 

Pound, Dollar to Rise if UK CPI and US Sales Data Boost Rate Hike Bets

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“UK CPI figures headline the economic calendar in European trading hours. The core year-on-year inflation rate is expected to remain at 1.2 percent in March, unchanged from the prior month. UK economic news-flow has improved relative to consensus forecasts over recent weeks however, opening the door for an upside surprise. Such an outcome may boost Bank of England rate hike speculation and send the British Pound higher.

 

 

“Later in the day, the spotlight shifts to the US Retail Sales report. Receipts are seen rising 1.1 percent in March, producing the largest monthly gain in a year. A strong result would come on the heels of a pickup in overall US data flow since late March and may prod investors to rethink the probabilities of a Federal Reserve interest rate hike near the mid-year mark (as it stands, the first increase in the baseline lending rate is being priced in for October by the futures markets). The US Dollar is likely to rise in this scenario.”

 

Any Euro Rally on ECB Economic Optimism to Prove Short-Lived

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“In a week that was seemingly setup neatly for further constructive price action, the Euro squandered the opportunity, and was the worst performing major currency covered by DailyFX Research. EURAUD plummeted by -4.11% to close at A$1.3804; EURUSD dropped by -3.44% to close at $1.0604; and EURGBP eased by -1.45% to close at £0.7248. Despite an overcrowded short position in the Euro, strong economic growth momentum in the short-term, and another temporary resolution to the Greek liquidity crisis, traders were simply not convinced that the Euro deserved to break loose of its cross-asset ties: higher equity markets and flattening yield curves across the region dictated the course of action.”

 

Japanese Yen May Fall as China Stimulus Bets Fuel Risk Appetite

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The Australian and New Zealand Dollars underperformed in overnight trade, falling as much as 1.0 and 0.86 percent on average against their leading counterparts. The selloff followed a disappointing set of Chinese Trade Balance figures that showed exports slumped 15 percent year-on-year in March, falling dramatically short of expectations calling for a 9 percent increase and yielding the largest drawdown in over a year.

 

 

“China is Australia and New Zealand’s largest trading partner. A slump in the East Asian giant’s overseas sales points to ebbing demand for raw materials from the two Oceanic countries, warning of mounting headwinds to economic growth. That in turn has scope to translate into interest rate cuts from the RBA and the RBNZ. Indeed, the overnight slide in the Aussie and Kiwi Dollars played out alongside down moves on the two countries’ benchmark 2-year bond yields, pointing to building stimulus expansion bets.

 

 

“Looking ahead, a quiet economic calendar in European and US trading hours is likely to see risk sentiment trends in charge of price action. The Shanghai Composite and Hang Seng Index stock benchmarks moved conspicuously higher after the dismal Chinese trade data, hinting investors may have interpreted the outcome to mean that Beijing will see the slump as a trigger to top up stimulus measures. The prospect of expanded policy support in the world’s second-largest economy may fuel broader risk-on sentiment later in the day, trimming Aussie and Kiwi losses while applying pressure to the safety-linked Japanese Yen.”

 

 

US Dollar Looks to Fed-Speak for Direction, Canadian Dollar Pressured

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The economic calendar is quiet in European trading hours, leaving traders waiting for the day’s helping of official Fed commentary to offer direction cues. Richmond Fed President Jeffrey Lacker – a member of the rate-setting FOMC committee – is due to cross the wires.

 

 

“The US Dollar has made a bid to renew its long-term uptrend after the release of minutes from the March Fed policy meeting earlier this week reignited the possibility of a mid-year interest rate cut. Mr Lacker is a relatively neutral voice on the FOMC. If his remarks hint at the serious probability of “liftoff” at the June/July policy meetings, the greenback may extend yesterday’s advance.

 

 

“The Canadian Dollar under-performed in overnight trade, falling as much as 0.2 percent on average against its leading counterparts. The move may reflect pre-positioning ahead of the upcoming release of March Unemployment figures.

 

 

“Expectations suggest the jobless rate will rise to 6.9 percent, the highest in six months, which may inspire the Bank of Canada to deliver additional monetary stimulus. Indeed, the Loonie’s decline since mid-2014 tracked a parallel slide in front-end bond yields, pointing to a dovish shift in policy bets as the catalyst.”

 

Pound May Find Little Direction in Bank of England Rate Decision

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“A monetary policy announcement from the Bank of England headlines the economic calendar in European trading hours. Governor Mark Carney and company are widely expected to keep rates unchanged. Indeed, futures markets price in no change in policy until the first quarter of next year.

 

“The BOE does not release an explanatory statement at meetings where no policy change was undertaken. That means investors will probably have to wait for the release of minutes from the sit-down to get a glimpse at what actually transpired. This means the announcement may amount to a non-event for the British Pound.”

 

FOMC Forward-Guidance in Focus; EUR/USD Vulnerable to Less-Dovish Fed

 

Christopher Vecchio, Currency Analyst, at DailyFX, comments:

 

“Greece raised cash to cover its upcoming loan repayments, but EURUSD has only recovered modestly as traders await the March FOMC minutes. The minutes have the potential to be quite market moving today, as the March meeting produced a dovish policy statement alongside weaker economic projections for 2015. Similarly, the Fed’s dot plot showed that the FOMC was essentially taking two rate hikes off the table this year, prompting the stretch of US Dollar weakness we’ve seen since mid-March.”

 

US Dollar, Yen, Commodity FX Set Sights on FOMC Minutes

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“A relatively quiet economic calendar in European trading hours is likely to see investors looking ahead to the release of minutes from the March Federal Reserve policy meeting for direction cues. Traders will be keen for confirmation of the dovish shift in timing bets on the first post-QE rate hike. Futures markets reveal a lean toward an increase in October after Friday’s dismal payrolls data, a far cry from earlier speculation about June or July.

 

“Signs of trepidation on the rate-setting FOMC committee are likely to weigh on the US Dollar and may boost risk appetite, offering a lift to sentiment-sensitive Australian, Canadian and New Zealand Dollars while punishing the safety-linked Japanese Yen. Alternatively, rhetoric suggesting Janet Yellen and company will look through the dip in economic activity in the first quarter – a move similar to their steadfast commitment to “tapering” QE even as growth slid in the first three months of 2014 – may generate the opposite dynamic.”

 

Pound May Fall on Soft PMI

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“UK Services PMI data headlines the economic calendar in European trading hours. Expectations suggest the pace of activity growth in the non-manufacturing sector will modestly accelerate in March. UK economic news-flow has tended to disappoint relative to consensus forecast recently, warning that analysts may be overestimating the economy’s vigour and opening the door for a downside surprise. Such an outcome may push out bets on a Bank of England interest rate hike further into the future, weighing on the British Pound. As it stands, futures markets are pricing in expectations for the central bank to begin dialling back stimulus in the first quarter of 2016.”

 

 

NZ Dollar Gains on Export Price Data, Aussie Falls with Iron Ore

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“The New Zealand Dollar outperformed in overnight trade, rising as much as 0.4 percent on average against its leading counterparts. The move followed data from ANZ showing the price of New Zealand’s commodity exports on global markets jumped 4.6 percent in March, marking the largest increase in 23 months.

 

“The Australian Dollar proved weakest on the session, sliding as much as 0.5 percent against the majors. The move mirrored weakness in iron ore prices, which slid to the lowest level in at least seven months. Metal ores are the largest component of Australian exports, accounting for close to 31 percent total overseas sales.

 

“UK Construction PMI data headlines an otherwise quiet economic calendar in European trading hours. The report is expected to show a slight slowdown in the pace of home-building sector activity in March. UK economic news-flow has cautiously deteriorated relative to consensus forecasts for the past two months, opening the door for a downside surprise. Such a result may undermine BOE rate hike bets and weigh on the British Pound, although significant follow-through is unlikely.”

 

Euro, Aussie Dollar May Rise as Yen Falls on Greece Funding Deal

 

Ilya Spivak, Currency Strategist, at DailyFX, comments:

 

“Markets are likely to look beyond March Eurozone CPI figures as the spotlight remains on Greece. Athens submitted a list of proposed reforms on Friday. The markets now await the verdict on whether the “institutions” representing Greece’s creditors – the EU, the ECB and the IMF – will approve it and unlock the next round of bailout funding. Investors fear that if external funding is not secured, a cash crunch and subsequent default may lead to the country’s exit from the Eurozone.

 

“On balance, both sides of the negotiation are interested in a deal. Prime Minister Alexis Tsipras and company surely realize that a disorderly redenomination will probably compound the country’s economic woes and cost them their jobs. Meanwhile, EU and IMF officials no doubt prefer to avoid a “Grexit” scenario for fear of the precedent it may set. On balance, this means that some kind of accommodation is more likely than not.

 

“An accord that prevents a default and keeps Greece in the currency bloc is likely to prove supportive for the single currency. Follow-through may be somewhat limited however as on-going ECB QE casts a dark cloud over the near-term outlook. It may likewise boost overall risk appetite, sending the sentiment-geared Australian and New Zealand Dollars upward while punishing the safe-haven Japanese Yen. Needless to say, failing to reach a deal stands to produce the opposite response.”