26 March 2010 at 13:27 GMT
FX Update: EUR gets a little relief - more to come?
China heading for renewed yuan "float"
The cat is slowly emerging from the bag on the Chinese yuan issue. Overnight, Fan Gang, an "adviser" to the PBOC said overnight that China is likely to allow the yuan to resume the managed float regime it followed from mid 2005 to mid 2008. This is not earth shattering news, as it is largely in line with expectations, but the emergence of such rhetoric suggests that the odds are growing that a renewed float will come sooner rather than later. The main question for the rest of us is what effect any renewed float will have on the rest of the FX world. There may actually be little drama in markets on such a development, though such a move would likely come as another policy tool aimed at cooling the Chinese economy, and once that cooling begins to take affect, the deflation of bubble like pressures in some Chinese asset markets could be bearish for risk and the countries most exposed to the Chinese growth engine. Here, we would particularly single out the longer term risks to Aussie, especially considering the levels it is reached versus the rest of the G-10.
Resurgent Euro?
The Euro took a cane to the rest of the market in overnight and into the early US hours as the investors perhaps took note of the real developments in risk spreads in Greece rather than focusing on the rhetorical broadsides from Trichet. Could we have seen a peak here in the Euro weakness broadly speaking? We underline broadly speaking, because the Euro may have a hard time keeping up with the USD if risk aversion strikes. Still, crosses like EURAUD, EURNZD and EURSEK may have established significant bottoms here. Good detail on what has gone on in Brussels over the last couple of days can be found here.
Chart: EURAUD
Euro is surging in some of the crosses, possibly suggesting that the Euro weakness on a broader basis may have peaked for now. Certainly, if a wider bout of risk aversion settles in here, other currencies - particularly the commodity currencies - may underperform the single currency if PIGS debt spreads remain more or less stable or even improve.
Chart: PIGS Spreads and Euro
Our simple model of PIGS debt spreads (10-yr. debt suggests that some of the pressure should be easing here on the Euro
Looking ahead
As we wrote yesterday, today's key is how the markets want to finish off this week after a day like yesterday, which saw a fairly dramatic reversal in risk appetite. Shortly we have the final March reading for the University of Michigan confidence poll. Next week is a very busy one for economic data out of the US, with the Consumer Confidence (huge dip last time), the ISM Manufacturing survey, and the Friday employment report (Is this really going to be released on a market holiday (Good Friday) as the major news services and official BLS site indicate?? This looks suspect...). Australia reports Retail Sales midweek and Japan's quarterly Tankan survey is set for release on the first day of the new Japanese financial year on April 1.
Economic Data Highlights
- New Zealand Feb. Trade Balance out at +321M vs. 433M expected and 263M in Jan.
- Japan Mar. Tokyo CPI ex Fresh Food and Energy out at -1.2% YoY as expected and vs. -1.3% in Feb.
- Japan Feb. National CPI out at -1.1% YoY as expected and vs. -1.3% YoY in Jan.
- Japan Feb. National CPI ex Fresh Food and Energy out at -1.1% YoY as expected and v. -1.2% in Jan.
- Norway Mar. Unemployment Rate dropped to 3.1% vs. 3.2% expected and 3.2% in Feb.
- Sweden Feb. Trade Balance out at +0.6B vs. 8.5B expected and vs. 8.3B in Jan.
- US Q4 GDP final estimate adjusted down to 5.6% vs. 5.9% previous estimate
Upcoming Economic Calendar Highlights
- US Mar. Final University of Michigan Confidence (1355)
- US Fed's Warsh to Speak (1530)
- US Fed's Bullard to Speak (2000)
- EuroZone ECB's Papademos to Speak (2000)
- US Fed's Trullo to Speak (2200)
- US Fed's Sack to Speak (2315)
- EuroZone ECB's Orphanides to Speak (Sat 1615)
- Japan Feb. Retail Trade (Sun 2350)