Sterling has been blasted lower after BoE governor Carney cast doubt on a previously pretty-much-expected UK May rate hike. The EU's rejection of Britain's latest Brexit-Irish border plan only served to deepen the rot.
Article / 14 February 2014 at 7:57 GMT

EURUSD pushing 1.3700 on EU GDP numbers, Fed taper scepticism

Head of FX Strategy / Saxo Bank

• EURUSD vault attributed to substantial trade
• JPY crosses in limbo before next directional trigger
• Italy to get 3rd government in as many months

By John J Hardy

JPY crosses were back on the defensive overnight in a marked divergence from the constant bulling up of equities in Europe and US sessions of late. It’s a confusing environment for JPY traders, as the very weak US retail sales data has been filtered, once again, through the monetary policy/liquidity implications, meaning that the market is beginning to pull back on its belief in the taper, which supports risk, but bonds too and also makes Bank of Japan (BoJ) policy look less dovish relative to the potential shift in the Fed’s guidance if US data continues to weaken. The June 2015 Fed funds contract, to take an example, is back to within a couple of ticks of the recent highs after trying to tick a bit lower when Fed chair Janet Yellen’s testimony didn’t prove quite as dovish as expected or feared.

The word on the Street is that somebody, somewhere, needed a lot of euro in a hurry.
Photo: PJPhoto / iStock

Chart: EURJPY versus DAX

The JPY carry trade is having a tough time of it lately, as JPY crosses have been on the defensive despite generally strong risk appetite globally. Whether this is due to creeping worries about the intent of the Bank of Japan to expand on its currency programme over fears of its causing uncomfortable stagflation, or if it is a leading sentiment indicator on the status of the global carry trade/risk appetite remains to be seen. For now, JPY crosses are in limbo until we get the next directional impulse, but with the general observation that the resilience of the JPY in the face of a screaming rally in equities is noteworthy.


Source: Bloomberg

Elsewhere, EURUSD jumped yesterday through local resistance and stops on not a jot of detectable developments or news and well before the US retail sales release. There was general word in the market of “large flow” meaning that someone needed to buy a lot of EURUSD “right now”. Technically, the pair still looks quite strong, but it is tough to build a case for significantly higher levels from here — let’s see how the action treats the 1.3700 level after the French and German GDP numbers were a bit better than expected this morning. The pair has seen an incessant bout of reversals as each directional impulses in either direction has failed to gain traction.


The EURUSD chart has suffered a string of four false breaks recently, starting with the run-up to almost 1.3900 at the end of last year and most recently with the attempt below 1.3500 that was firmly rejected in the wake of the do-nothing European Central Bank (ECB) meeting. Are we set now for another break higher that fails to follow through or can the EURUSD bull through to new highs for the cycle? The onus is on the bears to prove themselves as local strength here has been impressive.


Source: Saxo Bank

Italy’s political situation has shifted once again, as Prime Minister Letta will resign and a new government will likely be led by Matteo Renzi to form Italy’s third government in third months.

Sweden's central bank, the Riksbank, proved a bit dovish yesterday as forecasts for growth were revised slightly lower and the focus on disinflation/deflation risks suggested a dovish turn away from the previously more intense focus on private debt levels. This could be the pivot point for SEK strength to finally yield to more pronounced SEK weakness. EURSEK is one to watch for a close above 8.90 again, but NOKSEK and USDSEK could also be interesting ways to look for SEK weakness from here.

In Norway, Norges Bank’s Governor Olsen gave an annual speech last night which provided no real takeaway for the market in interest rate terms. He warned against relying on a weak krone to remain competitive. Norway has a serious labour cost problem as unit labour costs have risen by 40 percent or more against some of its European peers in recent years. Dutch disease, anyone? Interesting that EURNOK has popped back into the range after leaning lower yesterday — will that 8.32 area support hold after all?

Note that New Zealand house prices fell more than expected — are the Reserve Bank of New Zealand’s macro-prudential measures taking hold? If we see more signs of stress in housing from here it may ease up the market’s anticipation of rate hikes from the bank, which are still running at around 120 basis points over the next year. It's very hard to build an upside on top of this very aggressive market forecast.

Looking ahead

The economic calendar today is rather thin. There are minor US numbers out later in the day. With JPY crosses nervous and after the tremendous run-up in risk appetite this week, we should look for how the market closes the week as a setup for next week — do we see an additional flourish of aggressive confidence, or an ugly sell-off that leaves markets nervous going into next week. 

Next week’s key event risks include the FOMC minutes and the German ZEW survey

Economic Data Highlights

  • New Zealand Jan. REINZ House Price Index out at -2.4% MoM vs. -1.0%
  • China Jan. PPI out at -1.6% YoY as expected and vs. -1.4% in Dec.
  • Chian Jan. CPI out at +2.5% YoY vs. +2.4% expected and +2.5% in Dec.
  • France Q4 GDP out at +0.3% QoQ and +0.8% YoY vs. +0.2%/+0.6% expected, respectively and vs. +0.3% YoY in Q3
  • Germany Q4 GDP out at+0.4% QoQ and +1.4%YoY vs. +0.3%/+1.3% expected, respectively and vs. +0.6% YoY in Q3 (WDA)

Upcoming Economic Calendar Highlights (all times GMT)

  • Euro Zone Dec. Trade Balance (10:00)
  • Euro Zone Q4 GDP (10:00)
  • Canada Dec. Manufacturing Sales (13:30)
  • Canada Jan. Existing Home Sales (14:00)
  • US Jan. Industrial Production and Capacity Utilization (14:15)
  • US Feb. Preliminary University of Michigan Confidence (14:55)
  • Euro Zone ECB’s Weidmann to Speak (17:30)
  • New Zealand Performance of Services Index (Sun 21:30)
  • New Zealand Q4 Retail Sales ex Inflation (Sun 21:45)
  • Japan Q4 GDP (Sun 23:50)



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