Focus quickly shifting beyond today’s multiple witchings

With today’s multiple witchings almost behind us, it’s time to look forward at a very busy calendar next week. How will the markets start the new quarter? Heavy US data and ECB/BoE meetings the focus.

The Euro Zone finance ministers today decided to boost the EFSF/ESM firewall aimed at keeping the Euro Zone periphery liquid at some EUR 800 billion. This was apparently the “lowest common denominator” in the core countries like Germany, Finland and Netherlands, according to a Reuters article published today describing the negotiations. It’s a bit tough to isolate the market’s judgement of the outcome from other agendas at present, particularly the multiple “witchings”, but if we look at the EURGBP, it would seem that the market is mildly underwhelmed by this deal. One reason it is tough to react to today’s news is that we know it is more a question of politics going forward rather than maths. Looking at Spain’s long yields as a measure of market confidence, the spread wasn’t markedly changed on the day, though it was off its highs. EURUSD slipped back higher after teasing a bit lower yesterday, as we need a more marked crumbling of risk appetite to get the USD rally back on track, it seems.

Elsewhere, the JPY is finishing the year in Japan on a relatively strong note so far today as bonds remain relatively bid and on strong data out of Japan overnight (core CPI still -0.6% YoY, but that is 4th highest reading since May 2009. AUD and CAD have bounced against the hapless USD today, but can hardly be described as “strong” given the buoyant equity market ahead of the US trading session and their weakness against European currencies. GBP is bizarrely the star of the end-of-month/quarter ball today – not sure I know what is going on there – can only guess that some of the EUR and GBP resilience of late has something to do with unwinding formerly popular macro positions like short EUR and GBP vs. long commodity currencies and gold – positions that have been hurting for a month now.

Looking ahead
It is interesting that we kick off the quarter with such an action packed week next week, with Monday seeing a welter of Manufacturing PMI’s (including the US ISM survey), preceded in Asia by the latest Japanese quarterly Tankan survey. Later in the week we have global services PMI’s on Wednesday, an ECB meeting on Wednesday (due to Friday Easter holiday) and a BoE meeting on Thursday. The US employment report will be released despite the fact that this is a market holiday for equities – though the bond market is open.

Note the recent contrast in Asia between the Japanese Nikkei average, which has bolted to 10,000 on the weaker JPY of late, with the Shanghai Composite, which has come positively unglued over the last couple of weeks after rallying well off of approximately 30-month lows to start the year. There are some who argue that the Shanghai composite is a leading indicator on the major commodities indices, and there is reasonably strong evidence of that, and if so, that leads us to AUDUSD…

AUDUSD – careful where you look for confirmation of value
Others have pointed out that AUDUSD looks underpriced relative to its normal correlations (mostly risk appetite in this case), but the correlation with commodities and the price of BHP Billiton shares (for example – as they are an expression of the belief in growth and future earnings potential from the Australian mining sector) and interest rate spreads have proven very influential as well, and often decisively so. That was certainly the case back in 2008. Equities were generally ugly for most of the year save for a chunky rally from March to May that year. By early July, they were close to challenging the lows for the year while AUDUSD was making new long-term highs on the cross-the board rally in commodities indices. The pair only crumbled once commodities prices climaxed and retreated. So, while it appears the AUDUSD has little momentum here to the downside over the last couple of days, to get excited about its upside prospects beyond mere further range trading, we’re more focused on China and commodities first and risk second. A peek at EURAUD, GBPAUD and AUDNZD charts gives a better idea of how the Aussie’s start has fallen of late.

AUD: The currency with nine lives?
For much of last year, it looked like the game was up for the Aussie, but it continued to come back from the dead on the themes of hard asset/commodity buying, and later very importantly as the currency featured the highest interest rate in a world of money printing profligacy as risk appetite recovered. But lately, the Aussie’s star has been fading on fears over China coming in for a landing, compressing interest rate spreads. There’s more to feed the sell-off in quarters to come, particularly if we get a large scale consolidation in risk appetite to top these other factors off. The chart below shows an indexed chart of the Aussie vs. an evenly weighted basket of the rest of the G-10 currencies.

As for EURUSD and GBPUSD, both of which technically look like they are ready for more to the upside, let’s see how the market reacts to incoming data and central bank meetings next week and the shift to a new month/quarter. I don’t see the fundamental drivers there to pull these two any higher, but have to show patience until/unless EURUSD closes well back through 1.3280/90. (For EURUSD, we have to reluctantly give leeway for a probe of the highs for the year and possibly the 200-day moving average rapidly falling below 1.3600 now as long as we remain above the 1.3250/1.3300 pivot area.)

Have a wonderful weekend.

Economic Data Highlights

• Germany Feb. Retail Sales out at -1.1% MoM and +1.7% YoY vs. +1.1%/+0.1% expected, respectively and vs. +1.7% YoY in Jan.
• Norway Mar. PMI out at 59.7 vs. 56.7 in Feb.
• Spain Feb. Retail Sales out at -6.4% YoY as expected and vs. -5.8% YoY in Jan.
• Switzerland Mar. KOF Swiss Leading Indicator out at 0.08 vs. 0.07 expected and -0.11 in Feb.
• Norway Feb. Retail Sales out at +1.1% MoM and +7.4% YoY vs. -0.2%/+2.7% expected, respectively and vs. +6.7% YoY in Jan.
• Euro Zone Mar. CPI estimate out at +2.6% YoY vs. +2.5% expected and +2.7% in Feb.
• Canada Jan. Gross Domestic Product out at +0.1% MoM and +1.7% YoY as expected and vs. +1.9% YoY in Dec.
• US Feb. Personal Income out at +0.2% MoM vs. +0.4% expected
• US Feb. Personal Spending out at +0.8% MoM vs. +0.6% expected
• US Feb. PCE Core out at +0.1% MoM and +1.9% YoY as expected and vs. +1.9% YoY in Jan.

Upcoming Economic Calendar Highlights (all times GMT)

• US Mar. Chicago PMI (1345)
• US Mar. Final University of Michigan Confidence (1355)
• US Mar. NAPM Milwaukee (1400)
• US Fed’s Kocherlakota to Speak (Sat 2230)
• China Mar. PMI Manufacturing (Sun 0100)
• China Mar. HSBC Manufacturing PMI (Sun 0230)
• Australia Mar. AiG Performance of Manufacturing Survey (Sun 2330)
• Japan Q1 Tankan Survey (Sun 2350)
• Australia Feb. Building Approvals (Mon 0130)