The race to the bottom for G3 currencies

FX Update: The race to the bottom for G3 currencies

The G3 currencies - USD, EUR, and JPY seem to be locked in a battle for title of "Most Pathetic Currency" at the moment. After a EUR rally attempt vs. the greenback and the Yen in the European session was beaten back, it appears that the Euro is "winning" in this battle for the moment. Still, look elsewhere and it becomes clear that the FX world has decided that the risk environment is positive and that buying nearly anything against these three is the path to profit.

Even the pound managed to firm impressively vs. this trio of currencies in today's trading with a solid move above 1.50 in GBPUSD and a swoon through the weekly pivot in EURGBP. Positive vibes for sterling stemmed from a strong Nationwide house price report and from an upward revision to the Q4 GDP number.

Actually, the G3 idea is not fully accurate, the fourth weak currency at the moment is the Swiss franc, which continues to consolidate after last week's climactic appreciation vs. the Euro on the clear impression from last week's SNB rhetoric that it wants to step away from intervention. That sudden realization likely triggered a bit of panic on market positioning that was not quite ready for such a development. As well, we have to consider the franc at least to some degree from a rate perspective, especially since we have just seen a large move in bond yields. Swiss yields will never keep up with yields elsewhere in an environment of rising yields.

EU trouble
The initial enthusiasm for the EU summit's "solution" to the Greek fiscal crisis has faded somewhat and is the clear driver for renewed negative sentiment for the single currency. While yesterday saw a minor widening of Greek debt spreads, today is seeing a more dramatic widening and this is weighing on the Euro, though in the Euro's defense, the spread-widening for the moment appears to be limited to Greek debt and not debt in other countries at the EuroZone periphery. We thought the EU solution might provide a bout of broad relief for the single currency, but at present, the market is second guessing its initial enthusiasm.  An interesting test for the single currency would be a deep correction in global equity markets and commodity currencies, in which case we suspect that the Euro might outperform the latter as the market is structurally already very short Euro and very long risk currencies.

Aussie
The Australia dollar has enjoyed quite the resurgence over the last couple of days after we had pointed out its previous relative underperformance, considering the generally risk willing environment. One of the triggers for the AUDUSD rally over the last couple of days was the Chinese equity market, as the Shanghai Composite has surged over three percent from its close last Thursday and pulled to a new two-month high. This puts AUDUSD within reach of recent highs and rather close to the falling trendline from the previous three peaks. Another support for the Aussie can be found in copper prices, which jumped to a new 18-month high beyond the recent range. As we have said before, the Aussie story is bound up with the China story, as China seeks to diversify out of US treasuries and into commodities. If (and in our view when) the Chinese economic juggernaut experiences a hiccup, growing pains, or [insert your metaphor here], this will be most clearly felt in the AUDUSD cross. Watch out for Australia Retail Sales tonight.

Chart: NZDUSD
NZDUSD looked like it might be ready for another attempt below the 200-day moving average (in black) as of the Friday close, but the resurgence in risk since then and preference for commodity currencies vs. the G3 has seen the pair pulling back toward the top of the range. It's all about risk - possibly with a Chinese twist as we pointed out in the paragraph about the Aussie - for the rest of this week for the commodity currencies.

Looking ahead
We said in our morning report yesterday that it is do or die time for the greenback, and that remains the case. Traders managed to beat back EURUSD after its attempt above 1.3500, but elsewhere, the greenback is on the ropes, as it appears to be lumped together with the other supermajor weaklings at the moment in favor of risk, risk, risk. Can only risk aversion save the greenback? Still, we've got quite  interesting major event risks to close the week (ISM, US employment report)that could see the market breaking either way. USDJPY is also poised at interesting level and appears to be unwilling to make a move ahead of the event risks late this week and the April 1 transition to a new financial year in Japan.

Economic Data Highlights

• New Zealand Feb. Building Permits rose +5.9% MoM vs. +2.0% expected
• Japan Feb. Overall Household Spending fell -0.5% YoY vs. +1.5% expected and +1.7% in Jan.
• Japan Feb. Jobless Rate was steady at 4.9% as expected
• Japan Feb. Industrial Production fell -0.9% MoM and rose+31.3% YoY vs. -0.5/+31.7% expected, respectively and vs. +18.5% in Jan.
• Germany Feb. Import Price Index rose 1.0% MoM and +2.6% YoY vs. +0.4/+2.0% expected, respectively, and vs. +1.4% YoY in Jan.
• Switzerland Feb. UBS Consumption Indicator out at 1.199 vs. 1.323 in Jan.
• UK Mar. Nationwide House Prices rose +0.7% MoM and +9.0% YoY vs. +0.2/+8.2% expected and vs. +0.2% YoY in Feb.
• Norway Feb. Retail Sales rose +0.3% MoM and +3.3% YoY vs. +0.6/+2.8% expected, respectively and vs. +0.2% YoY in Jan.
• UK Q4 Final GDP estimate out at +0.4% QoQ vs. +0.3% earlier estimate.
• Canada Feb. Industrial Product Price out at 0.0% MoM vs. +0.1% expected
• Canada Feb. Raw Materials Price Index out at +0.4% MoM vs. -0.5% expected

Upcoming Economic Calendar Highlights

• US Jan. S&P CaseShiller Home Price Index (1300)
• US Mar. Consumer Confidence (1400)
• US White House Advisor Volcker to speak on financial reform (1600)
• UK BoE's Haldane to Speak (1645)
• US Weekly API Crude Oil and Product Inventories (2030)
• US Weekly ABC Consumer Confidence (2100)
• UK Mar. GfK Consumer Confidence (2301)
• US Fed's Fisher to Speak (0015)
• Australia Feb. Retail Sales (0030)
• Australia Feb. Private Sector Credit (0030)
• Australia Feb. Building Approvals (0030)
• Japan Feb. Labor Cash Earnings (0130)
• New Zealand NBNZ Business Confidence (0200)
• Japan Mar. Small Business Confidence (0500)
• Japan Feb.  Housing Starts (0500)