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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.”

ECB Sets Table for Lower Euro Prices – Here’s How

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The European Central Bank’s (ECB) patience with the region’s lacklustre recovery may be running out, if one is to believe the rhetoric deployed by President Mario Draghi at the April press conference. Although the ECB held its main refinancing rate on hold at 0.25%, a record low, it was clear that the downturn in economic data over the past several weeks, highlighted by the headline March CPI figure coming in at +0.5% y/y, a four-plus year low (and far beneath the ECB’s medium target of +2%) has changed the game.

 

“There were several tweaks in ECB President Mario Draghi’s tone on Thursday that suggested a more dovish consensus is forming among the Governing Council Members. It was made clear that the council voted unanimously to explore the use of unconventional monetary policy measures, even as President Draghi noted that all the conventional tools hadn’t yet been deployed. Negative interest rates and a round of the ECB’s own version of quantitative easing (QE) was discussed.

 

“The implication that the ECB stands ready to act in the face of a deflating price environment and soft economic horizon inherently suggests an air of credibility to the idea that the ECB could implement non-standard accommodative policy measures. In meetings past, any such commentary that implied the desire for a weaker Euro or hope for continued improvement in growth was met with skepticism by the market; the Euro had developed the reputation for bouncing back after the past several meetings, including the November rate cut (an important low for EURUSD formed that day).

 

“Now that it’s been made clear by the ECB that it recognizes jawboning is losing gravitas – threats of action but no such specific action (see: the ECB’s success with bringing down PIIGS sovereign bond yields without having to operate within the scope of the OMT, not even once) – the path forward will require more explicit details of what measures the ECB might take going forward.”

Chicago Fed President’s Support of Continued Tapering May Drive USD Higher

Ilya Spivak, Currency Analyst at DailyFX, comments

 

“A quiet economic data docket in European and US trading hours offers little in terms of market-moving event risk. On the official commentary front, Chicago Fed President Charles Evans is due to come across the wires. While Mr Evans is not a member of the policy-setting FOMC committee this year, traders may be atypically responsive to any clues about the central bank’s thinking that he offers given the absence of other catalysts.

 

 

“Rhetoric supportive of continued “tapering” of QE asset purchases in the context of Friday’s upbeat US employment data may drive the US Dollar higher. S&P 500 futures are also pointing lower, hinting risk aversion sparked overnight by a dismal set of Chinese trade figures released over the weekend may reinforce support for the greenback. The plunge in exports was particularly dramatic, with overseas sales down -18.1% year-on-year to produce the largest drawdown since August 2009.”

 

 

Risk sentiment on the upswing across financial markets after Putin recalls troops

Ilya Spivak, Currency Analyst at DailyFX, comments:

 

“Risk sentiment is on the upswing across financial markets after yesterday’s Ukraine-inspired bloodletting. The newswires are attributing the chipper mood to reports that Russian President Putin recalled troops that had been performing military exercises in the western part of the country near the Ukrainian border.

 

“Shares are soaring across European exchanges and S&P 500 futures are pointing firmly higher ahead of the opening bell on Wall Street, pointing to more of the same as North American markets come online. In the FX space, the safe-haven Japanese Yen is broadly under pressure while the sentiment-geared Australian and New Zealand Dollar are outperforming. Not surprisingly, the regionally sensitive Euro is likewise on the upswing.

 

“The US economic calendar is all but empty, suggesting little stands to derail momentum. Richmond Fed President Jeffrey Lacker is due to speak with the media and, considering the central bank’s recent efforts at projecting consensus, seems likely to repeat now familiar rhetoric backing continued “tapering” of QE. Importantly, the situation in the Ukraine is far from off the radar and remains a potent wildcard. Deeper escalation of tensions remains a clear possibility and risk trends may turn south as swiftly as they recovered on the back of unforeseen headline risk.”

 

 

 

Euro stuck in the mud

 

Christopher Vecchio, Currency Analyst at DailyFX, comments:

 

“The EURUSD has been trapped between $1.3680 and 1.3770 for the better part of the last week, and it’s going to need a catalyst aside from French jawboning about how a weaker Euro might help exports to move it from this range. Tomorrow, preliminary figures for February out of Germany could weigh heavily on the ECB meeting next week as concerns over German price levels continue to paint a negative picture for overall prospects in the EU as of late.

 

“A wave of deflation sparked by declining growth in the Euro-Zone would be detrimental for the Euro-Zone and could prompt Draghi of the ECB to take further dovish policy action. At present time, this would like be in the form of a 0.15% rate cut. After the German Constitutional Court ruling, the ECB’s hands are tied as to unsterilising its bond purchases (which would effectively double excess liquidity in the Euro-Zone) or unveiling an outright, open-ended QE program.

 

“If anything, as we’ve maintained since before the ECB cut its main rate to 0.25% in early-November, any further non-standard action by the ECB is likely to resemble a BoE-styled Funding for Lending Scheme (FLS). This has become more appealing for the ECB as it could address credit concerns without putting the Euro at risk of a massive ECB balance sheet expansion that another LTRO or a Fed-styled QE would bring – which the GCC advised against. The ECB meets next Thursday, March 6.”