FX Update: EU summit prospects dim Euro outlook

It looks like this weekend’s EU summit will be much ado about nothing, as signs emerge that EU politicians want to push the decision making all the way to June. This is hitting the Euro rather hard after the initial story broke – more Euro downside to come?

Euro worries creeping back
With the tense political situation in Portugal (a possible collapse of the government if the budget is rejected as expected today) and Irish bond yields spiraling out of control, the market finally decided to pull back on long Euro bets ahead of this weekend’s crucial summit. With the potential chaos in Portugal at the moment and negotiations between Ireland and some other EU leadership at an impasse over Ireland’s low corporate tax levels, one wonders how much this summit can accomplish and whether some negotiations may be extended to some follow-up summit down the road. On that very note, a Reuters story out almost as we are writing this saw the Euro on shaky ground as it suggested that this weekend’s summit would accomplish nothing on the issue of expanding the EFSF rescue facility or any progress on Ireland and that we will have to wait until June (!!) for decisions. One would presume that this kicking of the decision making down the road would put a decent dose of pressure on the EUR for as long as the PIGS issue is put on the front burner and the focus on Trichet’s saber-rattling on inflation. Can we imagine a scenario in which the ECB starts hiking while EU politicians twiddle their thumbs and make no progress on showing a commitment to keep the EuroZone project a running concern? The markets are telling us now that this is priced in.

BoE Minutes – Quelle surprise?
Were the Bank of England minutes really such a shocker to deserve the market reaction we saw today? While the unchanged 6-3 voting mix (Six in favor of the statement, one in favor of more asset purchases, one in favor of +25 bps and soon to exit arch-hawk Sentence in favor of +50 bps), did see the market unwinding a few bps of forward expectations, the delta in the spreads was hardly remarkable and the rather outsized market reaction is a bit of a head-scratcher. EURGBP vaulted higher and then retraced about half of its gains as the market wobbled on keeping a bid under a Euro cross. The pummeling in GBPUSD is more in line with the general interest rate spread picture as we pointed out in yesterday’s video as spot had crept to new highs while interest rate spreads are still well within the range from recent weeks. We must also consider that these minutes were from a meeting that took place the day before the March 11 disaster in Japan.

Looking ahead
Risk appetite hasn’t done much of anything over the last 24 hours in the US, but copper prices are off to the races again and AUDUSD has hung in rather well, so one wonders if a renewed commodity focus could drive that pair higher, even if the rally has been awfully steep of late and rate expectations for the RBA are fairly moribund. Let’s see whether the US S&P500 resistance at the 55-day moving average remains in place. If it does, the AUDUSD rally may remain capped, as two out of three (resistance from risk appetite and rate spreads despite some support from commodity prices) might be sufficient to keep a lid on this commodity currency.

The JPY crosses have gone awfully quiet as the market can’t decide what it wants to do there. The lack of follow through to the upside may suggest that hasty longs established after the initial round of intervention mighty come under pressure. The obvious very large focus here is on the 80.00 level in USDJPY. Non-USD JPY crosses could expereience considerable pressure over the next couple of sessions if fixed income can keep a bid and risk appetite comes off a bit more.

There may be some focus today on the budget Chancellor Osborne is out discussing as we write this. The projection is for a 2011-12 budget of deficit of GBP 122 billion versus GBP 146 billion this year.

Many have discussed the potential for the JPY to strengthen on repatriation flows, but few have discussed the same phenomenon for the NZD after its own devastating earthquake, where insured damages might be larger than Japan’s in terms of GDP. Today, we learned that the current account deficit for New Zealand for Q3 of last year was revised to the smallest level in a decade, at least partially due to insurance money streaming into the country for paying for damages from the first Christchurch earthquake. Is there further potential NZD upside in some of the crosses on this phenomenon from the more recent quake in Q1 of this year?

Watch out for US New Home Sales for February a bit later. There is nothing to indicate any signs of a pulse in the US home market and likely won’t be any real recovery until a real lending market develops down the road (sans Freddie and Fannie, years in other words…)

Economic Data Highlights

• New Zealand Q4 current account out at -3.524B vs. -2.2B expected and vs. a revised -0.03B for Q3
• Sweden Mar. Consumer Confidence out at 19.0 vs. 20.3 expected and 21.4 in Feb.
• Sweden Mar. Manufacturing Confidence out at 13 vs. 9 expected and 11 in Feb.
• UK BoE voted 6-3 at last meeting
• UK Feb. BBA Loans for House Purchase rose to 29,923 vs. 29,350 expected and 29.159 in Jan.
• EuroZone Jan. Industrial New Orders out at +0.1% MoM and +20.9% YoY vs. +1.0%/+21.4% expected, respectively and vs. +19.2% YoY in Dec.

Upcoming Economic Calendar Highlights

• US Feb. New Home Sales (1400)
• US Weekly DoE Crude Oil and Product Inventories (1430)
• US Fed’s Bernanke to Speak to Bankers (1600)
• New Zealand Q4 GDP (2145)
• Australia Jan. Conference Board Leading Indicators (2300)
• Japan Feb. Merchandise Trade Balance (2350)
• Australia RBA’s Financial Stability Review (0030)
• Australia RBA’s Edey to Speak (0215)
• China HSBC China Manufacturing Survey (0230)