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Written by Boris Schlossberg Senior Strategist

$ Right Back to Support
€ Sunk By Rates
¥ Tightening
₤ Collapse of Cable
₣ No More Safe Haven









Right Back To Support

We broke the 200K barrier. In fact at 245K the NFPs exceeded most consensus calls of 210K but the figures from the month prior were adjusted downward to 173K from 190K originally reported and that muted some of the dollar rally. Still the greenback recovered almost all of its losses from last week as traders now bet that 5% Fed funds was a done deal.

To that end the statement earlier in the week by William Poole, the President of St. Louis Fed’s that the Central Bank was prepared to become even more aggressive player in its rate hike campaign if future US economic data proved robust started the dollar rally going by taking the EUR/USD down by 150 points in less than 24 hours on Tuesday.   

Next week however, may not be as friendly to dollar bulls as they will face the prospect of poor Retail Sales comparison and the possibility of second consecutive month of TIC data not covering the record Trade Deficit reported this week.  Should that be the case market jitters about the US balance sheet position may well reassert themselves. In short as we noted on Friday, “Although the (NFP) number did not hurt the dollar significantly in the short term, it did little to help it.”







Sunk By Rates

The Eurozone data continued to produce mostly positive results this week but the strong momentum of the past few weeks was gone. German Industrial Production for example fell markedly below expectations registering a reading of -0.1% versus 1.00% expected. However a closer examination of the figures revealed that  almost all of the loss was caused by the 7.3% drop in construction spending which in turn was likely affected by unseasonable cold weather in the region. Still the lackluster IP readings and the slight but unexpected drop in Retail PMI were enough to weaken the unit against the onslaught of hawkish rhetoric from US monetary officials

Next week event risk lies with the ZEW survey which is projected to reach 71 from last month’s 69. European investors optimism however may be dented by the higher oil prices in February and the possibility for a small decline in the reading exists.  Aside from ZEW only EZ Industrial Production numbers at the end of the week will merit traders attention, leaving the EUR/USD to the whims of US data.







Tightening?

Despite the 7-1 vote by the BOJ to finally shift away from the 5 year old ultra-loose Quantitative Easing Monetary Policy the yen continued to lose ground against the greenback, dropping yet another 300 points as USD/JPY pierced the 1.1900 figure to the topside. On Thursday we wrote, “The initial reaction which saw the dollar gain nearly 80 points off the news may have appeared to be counterintuitive, but traders were reacting to the fact that the overall tone of the BOJ statement remained accommodative since the bank decided to keep the Zero Interest Rate Policy in place.” In fact with Household Spending still contracting on a year over year basis the move away from ZIRP may not occur until 2007 which means that carry trade players still have plenty of time to squeeze out yield out of the trade.

Next week GDP numbers and Consumer Confidence surveys will headline the eco news, The one bright spot this week was the high reading in the Eco Watchers survey which may bode well for the Consumer confidence numbers this week. The first step to an increase in consumer spending is a rise in consumer confidence. If the CC report can breach the 50 boom/bust level yen longs may finally have something to smile about.








Collapse of Cable

So much for resiliency. Cable broke the 7500 7400 and the 7300 levels this week as the realization that the unit will soon become carry negative to the dollar began to dawn on the market. With almost no likelihood of a rate hike, and only a hope that UK rates will remain steady, the pound offered little reason for accumulation. At the beginning of the week, the unit found some support from M&A flows but strength was fleeting as corporate demand waned.

Next week claimant count, RICS survey and Retail Sales will all provide more clues about the stabilization scenario of the UK economy. However, the pound appears to be destined to tread water unless dollar bearishness reappears in the market. One key change in the unit this year maybe the fact that volatility in the pair will decrease as GBP/USD rates invert and the days of 300 point ranges so favored by short term traders may be a thing of the past,







No More Safe Haven

One of the more striking aspects of Swissie trade this year has been its decoupling from gold and its loss of prominence as a safe haven asset. The roots to this trend were laid in 2004 when the Swiss authorities decided to remove gold backing from the franc. However, the true effects of this policy are only starting to be seen now. The prime example of this new dynamic is EUR/CHF which this week nearly hit the 1.5700 level as the pair now traded on interest rate differentials rather than risk premium concerns. With ECB decidedly more hawkish than the SNB this trend could persist into the year, upending the long term relationship between the two currencies.
 

Traders this week will be able to gauge the true state of dovishness of SNB officials when the Central Bank meets to set it s interest rate policy this Wednesday. A 25bp hike is expected, but market players will want to examine the tone of SNB’s communiqu� for future clues to the banks monetary policy. If the bank appears to be reticent in its posture, the Swissie could come under additional pressure.