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FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

2011-03-07 12:20:00
Ilya Spivak, Sr. Currency Strategist
Share:

Major Currencies vs. US Dollar (% change)

28 Jan 201108 Mar 2011

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_table.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

EURUSD: Sovereign Risk Fears Return Amid Economic Data Lull

The outlook for interest rates remains in focus for the Euro after last week’s acutely hawkish turn in rhetoric from the European Central Bank pushed the single currency to outperform, but a quiet economic calendar this time around leaves the bulls with little fodder to feed momentum. This leaves the door open for the re-emergence of sovereign risk concerns after Moody’s cut Greece’s credit rating to start the week, citing the “enormous” task of reforming the nation’s finances and expressing uncertainty about funding support beyond 2013. The news comes a day before the European Commission is scheduled to issue proposals on how the EU ought to support southern Euro Zone member states, which will service as a baseline for Friday’s special European Council summit on competitiveness. Traders will closely monitor both events for clues on how much progress is being made toward reaching the storied “grand bargain” on dealing with sovereign risk within the regional bloc, due to be delivered at the end of this month. German Factory Orders and Industrial Production figures headline the economic calendar.

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_EUR.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

GBPUSD: All Eyes on Bank of England but Rate Hike Still Unlikely

As with the Euro, interest rate expectations remain of primary significance, putting the spotlight squarely on the Bank of England as it delivers its monthly monetary policy announcement. While traders are pricing in the likelihood of a rate hike at a paltry 17 percent, the hawkish shift in policymakers’ posture in the aftermath of the February’s sit-down of the rate-setting MPC has clearly attracted attention. Indeed, a Credit Suisse gauge of investors’ one-year tightening expectations hit a 14-month high last week. Given the central bank’s penchant for not releasing a statement along with the policy decision, anything shy of a surprise rate hike may see traders focus elsewhere to get their cues on the rates outlook. With that in mind, a pickup in Industrial Production and a 28-month high on the Producer Price Index promise to keep sterling relatively well-supported, although any pick-up in risk aversion amid the broadening crisis in Libya may prove to encourage gains in the safety-linked US Dollar.

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_02282011_GBP.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

USDJPY: Libyan Conflict’s Impact on Treasury Bond Yields in Focus

The short-term Treasury yield spread continues to guide USDJPY price action, hinting the escalating violence in Libya may dominate attention in the first part of the week. If the crisis continues to push oil prices higher, threatening the global recovery and pushing investors out of equities and into the safe-haven of Treasuries, bond prices stand to rise along with the Yen as yields decline. Alternatively, a respite in the conflict or (at least) a shift in traders’ focus away from the Middle East and back toward underlying fundamentals may see the opposite outcome. Gauging the probability of either scenario seems at least as difficult as forecasting the outcome of Libyan fighting on a given day, suggesting little can be said for certain save that volatility is likely. Economic data will come into play on Friday as the US Retail Sales report as well as the University of Michigan Consumer Confidence reading cross the wires, with an expected improvement on both fronts promising to underpin the greenback.

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_JPY.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

USDCAD, AUDUSD, NZDUSD: Risk Trends Remain in Focus, RBNZ to Cut Rates

The commodity currencies’ correlations with underlying risk appetite (as tracked by the MSCI World Stock Index) softened a bit from last week, but the link with sentiment remains the best-defined relationship guiding price action. To that affect, the focus falls squarely on the crisis in the Middle East and its implications for oil prices: if investors continue to see the turmoil as a credible threat to the global recovery, commodity currencies are likely to find themselves under pressure. On the economic data front, the Reserve Bank of New Zealand is widely expected cut interest rates by 25bps. Markets have priced in the move for some time however, hinting that an outcome in line with expectations my fall short of giving the bears enough to continue the push lower in the near term and open the door for a correction. Meanwhile, Australia’s Unemployment figures are likely to reinforce the status quo, carrying next to no significant implications for monetary policy and so passing with little fanfare. Canada’s labor-market figures are also on tap.

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_CAD.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_AUD.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

FOREX_TREND_MONITOR_Euro_Vulnerable_Near_1.40_RBNZ_to_Cut_Rates_body_030711_NZD.png, FOREX TREND MONITOR: Euro Vulnerable Near 1.40, RBNZ to Cut Rates

Source: Bloomberg

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