FX for the Week Ahead
Will the ranges break this week?
THEMES TO WATCH – UPCOMING SESSION
Market Comment:
USD rally - should it stay or should it go?
The currency market has been giving trend-seekers fits of late, with EURUSD's daily reversal act beginning to wear the market's patience thin as we kick off a new week. Friday, EURUSD was beaten back lower after yet another attempt through the 21-day moving average failed to bear fruit. So what is driving the USD of late? There are cross-currents that are pulling it in two directions at the moment and keeping it from breaking in either direction: First, risk aversion generally favors the USD as the world seeks a safe harbor and as so much of the asset bubble inflated before the bust was funded in dollars. On the USD-negative side, the market is likely dreading the Fed's inevitable move into outright quantitative easing and the , though it has so far failed to drive yields lower as we have seen in the UK after its outright declaration of debt monetization. We will continue to watch the EURUSD supermajor as our barometer for USD strength. There is little to argue for in favor of the Euro, save for the stabilization of intra-European sovereign debt spreads of late. While the economic picture in the US looks stark, the festering problems in the EuroZone (the EuroZone framework itself and the bank's exposure to EM problems) are ever-present and there is still the risk of the EUR looking less relatively attractive than the greenback. One wildcard risk to the USD that is raising its head as we are going to press is the price of oil , which is now trading ten dollars off its multi-year lows from February. This issue has been off the radar for a long time, but is still a relevant market to watch.
GBP: misery reaches new depths
The latest Bank of England meeting and announcement of quantitative easing measures - particularly the outright purchase of gilts - have seen the pound sharply weakening to its lowest levels in some time against the EUR and the USD. The expectation of active government buying in the market has pushed 10-year gilt yields sharply lower against their German counterparts. The long gilt had as much as a 100-bp higher yield last month, but now the spread has rapidly shrunk to a mere 18-bp advantage. Further down the line, it seems all major central banks will be forced down this path as well, but the market can't resist the obvious bait of shrinking yield spreads. Also adding to the pound's woes to start the week are new revelations of the latest tens of billions in banking losses at Lloyds and its newly taken over HBOS unit and rumors that Barclays may need to participate in the Asset Protection Scheme as well despite earlier promises of capital sufficiency that would allow them to avoid such a fate.
JPY continues to suffer on current account reversal
The sharply stronger JPY of recent months has wreaked breathtaking havoc on the Japanese economy. With most of the economy still geared toward export industries and the recent collapse in global trade flows, the Japanese current account has now moved into negative territory for the January data (on an unadjusted basis) for the first time since 1996. This represents a spectacular reversal from all-time highs in the CA surplus column posted in March of 2007. Still, much of the JPY weakness of late is about the market readjusting its JPY positioning as the starkness of the situation in Japan is painfully clear. The Yen is still a relatively safe place as long as the global deleveraging act continues and while the days of the massive bull trend in JPY may be well behind us, we could continue to see strong periodic rallies in the JPY as long as risk aversion is high, and especially if global yields continue to fall and commodities go nowhere fast.... Also, we have the hugely significant level of 100 coming on the radar as the financial year draws to a close in Japan this month. Will exporters want to lock in this level for the coming financial year? It may prove an important barrier to further JPY weakness.
CAD: USDCAD finally takes out 1.3000
The grinding weakness in global growth and especially the continued and seemingly ever-mounting woes south of the border have seen the loonie finally taking out the 1.3000 level here to start the week. The uptrend could continue as long as global markets fail to spark a reasonable rally in risk appetite. Longer term, we see extreme value in buying the likes of CAD versus the EUR as a relative play on fiscal robustness, but some patience will be required for this view.
Outlook: G20 on the radar
We're seeing increasing noise levels about the G20 meeting coming up on 2 April. The power brokers for the major G7 countries and the largest of the developing countries will be desperately trying to find a way to avert the global recession juggernaut and the institutions that used to be charged with bailing out trouble spots in the world economy but are overwhelmed by the scale of the current crisis - will they be able to come up with any credible plan? So far, the market has shown increasing cynicism with every new round of bailout schemes, and justifiably so. Stay tuned.
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