Quiet trading day
The car crash that represents FX developments in Q2 looks set to continue, with price action in EURUSD the most pertinent representation of how the price action in FX over recent weeks has defied the conventional wisdom. Friday saw a fairly substantial squeeze higher of over 1 big figure to make a new high of 1.1467 and we start the European session not that far below. The fact that bond yields have come down from the recent highs last week also underlines the extent to which the euro move looks like a short-squeeze, as those who have bet on a weaker single currency on the back of divergent monetary policy between the Eurozone and the US have been forced to throw in the towel. Furthermore, even though Greece is in the ‘endgame’ (according to ECB member Mersch over the weekend), this is also not impacting the euro, but that should not surprise given the history of Greece and ‘endgames’. Latest developments suggest that it was very close to defaulting on its IMF repayment last week and that the coffers really are starting to look very bare. The latest talk is of giving Greece a ‘take it or leave it’ ultimatum.
The data calendar suggests today should be fairly light in terms of risk events. Looking ahead, it’s the inflation data in the UK that grabs the attention for tomorrow. Sterling has performed strongly in the wake of the election, even though the Bank of England downgraded its growth forecast last week. Final inflation data is also seen in the Eurozone tomorrow, together with US numbers on Friday. The RBA will also release minutes to its latest meeting where it cut rates to 2% and suggest rates are likely to remain on hold for some time.
USD/JPY: At The Top Of Its 2-Month Range; What's Next?
Despite last week's USD-driven push towards the top of its two-month range at 122.0, USD/JPY should remain contained in the week ahead.
Helping constrain further USD/JPY strength in the near term, the BoJ appears likely to tinker with its assessment of the Japanese economy putting a more positive spin on the economic outlook in its monthly report release next week. Indeed, with this week's Q1 GDP release surprising to the top side, even a subtle shift in the BoJ's assessment could prevent further USD/JPY gains.
Equally, however, the 30 April minutes will maintain their note of caution and leave open the door to further stimulus if required – such was the view already expressed by both Governor Haruhiko Kuroda and Deputy Governor Kikuo Iwata in recent speeches.
Supporting this note of caution, April retail sales should moderate further, confirming the Japanese consumer still lacks confidence. Moreover, both the national and Tokyo CPI prints are unlikely to deliver what BoJ policymakers are hoping for – ie, a convincing trajectory back to 2.0%YoY inflation.
As such, we maintain our view that USD/JPY will rise further this year, just not in the week ahead if forecast revisions are delivered as expected.
How To Trade EUR/USD, USD/JPY This Week? - Nordea
What we need to seethis week is whether or not the great US jobs report translates into better consumption – the US retail sales is this week’s key number.
The biggest risk for the EURUSD is not just ok, but MUCH stronger numbers which would make the UST curve flatten instead, implying a more aggressive Fed.
Having reverted back below 1.1250, my target last week, the EURUSD may test support at around 1.1080, below which we may see the 1.0840-1.0964 area again. As long as above the latter, I prefer to be short term (weeks/month) bullish... but, God knows how strong the US retail sales will be. That said, if you look at the very recent history, such shocks to Fed funds futures rates have had transitory impact on the EURUSD - the trend has overall been shared! So what works for intraday doesn't work for weeks/months.
The USDJPY did jump above 125 again on the US Treasury yield shooting up last Friday, unlike expected. But with the strong wage data we got last week from Japan, and the recent commentary from the BoJ... I am still not keen on selling the JPY here. But that's just me.
USD Faces Further Upside Risk; EUR Rallies Remain A Sell - Credit Agricole
Risk sentiment has been unstable of late, mainly on the back of rising Fed rate expectations. Friday’s stronger than expected US labour data should reinforce the view that the Fed is considering higher rates in September. While such prospects should keep the USD in demand, they should come to the detriment of liquidity expectations and investors’ appetite for risk assets too. Nevertheless, from a broader angle further improving global growth expectations should compensate for falling liquidity expectations.
Elsewhere, we remain of the view that the EUR should be sold on rallies. While Greece-related uncertainty is likely to keep demand for EUR-denominated assets muted, the ECB made clear that QE will run its course regardless of improving growth and price developments.
This suggests that there is additional room of diverging Fed-ECB monetary policy expectations to the detriment of EUR/USD.
Ahead today it will be quiet in terms of market moving data releases. If anything the main focus will be on speeches by ECB members and ongoing developments as related to Greece.
The Case For Staying Short EUR/USD Into FOMC - Barclays
In its weekly FX note to clients today, Barclays Capital advises clients to stay short EUR/USD going into this week's FOMC meeting.
The following is Barclays' rationale behind this argument along with the details of its current short EUR/USD position.
USD into FOMC:
"Markets will pay close attention to the tone of the FOMC statement on Wednesday and watch for hints on the timing of the first rate hike. Given the recent pickup in US consumption and labor market data, we think the Fed is likely to maintain its view that the winter slowdown was transitory and that the economy is likely to expand at a moderate pace. Indeed, the pace of job growth has picked up, with payrolls rising 280K in May, and the Fed’s LMCI has increased since the April meeting.
Additionally, we expect the Fed to reiterate that inflation will gradually rise toward the 2% target in the medium term as the labor market continues to improve and inflation expectations remain stable," Barclays clarifires.
"Indeed, CPI data on Thursday, along with the latest import price data, should support our view that downward pressures on domestic core inflation from the lagged effects of USD appreciation will begin to wane going into the third quarter. As such, we continue to think the Fed is on track to hike twice this year (at the September and December meetings)," Barclays projects.
"Overall, we believe that the FOMC statements, along with CPI and other macro data, should support the USD," Barclays argues.
EUR amid Greek Uncertainty:
"Greek political uncertainty remains high, as the gap in negotiations between Greece and the Institutions remains substantial. The IMF is reported to have walked away from talks with Greek officials on Thursday because of the inability to find agreement on such issues as pension and tax reforms. Meanwhile, the economic and financial situation is continuing to deteriorate in Greece, with the state revenue shortfall having grown €1bn in May to reach a total of €2bn, and with the ECB having last week raised the limit on the Emergency Liquidity Assistance (ELA) to Greek banks by a further €2.3bn, to €83bn. The Eurogroup and ECOFIN meetings will be held on 18 and 19 June, respectively," Barclays notes.
We think a failure to find agreement will make it difficult to have a smooth resolution before the end of June, when the programme expires. Another extension of the programme is possible, although not straightforward as it would require the approval of some national parliaments, including the Bundestag in Germany," Barclays argues.
Staying short EUR/USD:
"We believe the market is underpricing the risks of increased volatility. We continue to recommend staying short EURUSD spot," Barclays advises.
The Trade: Barclays maintains a short EUR/USD position from 1.1240, with a stop at 1.1680, targeting a move to 1.0460.
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Are U.S. Savings Rates About To Rise?
On the eve of the FOMC’s rate hike, one could also ask how a potential higher interest rate affects the U.S. savings rate. After all, the basic idea we are all thought in econ101 is that when interest rates go up, savings rate should also follow and pick up: It could come because people want to postpone their consumption to a later date as they get a bigger carrot in the form of higher rates. Or perhaps it could be because higher rates also suggest a potential decline in wealth – if we were to assume that interest rates have an adverse impact on stocks and real estate – so that people feel they have less money and as such consume less. If they consume less, it means, by definition, people save more.
All this is good and seems like a very convincing story line, the only problem is that the data suggest otherwise.
The chart above shows the changes in 10-year yield bonds and savings rates. So yes, it’s long term yields, but the picture doesn’t change by much even if were to examine the 1 year yield bonds as you can see for yourself in this link to FRED.
And even though the correlation of the monthly percentage points is weak at only -0.07 the trend lines have a much strong correlation of -0.70. So this finding also suggest that in times of high interest rates, savings rates are low and vice versa (or is it the other way around).
So what is going on?
For one, it could be a matter of putting the cart before the horse: Perhaps we see low interest rates because of weaker consumption and Fed’s policy to stimulate the economy as was the case in the past few years, so of course we’ll see higher savings rates. When the economy is heating up, the Fed tries to cool it down so it won’t overheat with high inflation and as such interest rates pick up as in the mid-00’ and savings rates were low.
Another possibility is that in dire times with soaring high debt levels, people are deleveraging and spend less. So no matter how attractive or low the interest rates are, people want to keep on cutting down their debt burden.
I could go on and examine more possibilities, we haven’t even talked about the role of government and its impact on savings rates and total savings and does it cause a paradox of thrift, and make the case for this negative relation — there are certainly more appealing “stories” that will tell why higher interest rates are also linked to lower savings.
But the bottom line is that when interest rates will start to rise again, we could see lower savings rate. Is it good or bad for the U.S. economy? It will suggest higher consumption, which most people aren’t likely to oppose. But since savings, under equilibrium and certain assumptions, equal investments; then lower savings could suggest lower investments, which isn’t good for companies. So it all depends on which side of the economy you are at. In any case, rates are likely to remain low this year and even next so we should expect any major changes in the savings rates anytime soon.
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GBP: Welcome To Super Thursday; What To Expect? - BofA Merrill
Traders' attention turns to Super Thursday this week when the Bank of England (BoE) simultaneously publishes its interest-rate decision, the minutes of its policy meeting, and the Quarterly Inflation Report forecasts (QIR). Here is the bottom line that Bank of America Merrill Lynch expects for this day and its immediate impact on GBP.
Rate hikes are coming, but not likely till next year:
1- "It will likely highlight that the economy looks stronger than it did three months ago. Growth bounced back to 0.7% QoQ in 2Q, slightly better than the central bank had projected. Productivity looks perkier. Faster supply growth could, in principle, mean weaker inflationary pressures. But probably not in this case as wage growth has picked up smartly too. The expansion seems to be gradually shifting onto a more sustainable footing," BofA projects.
2- "There are probably fewer reasons to think inflation will undershoot the 2% target in the medium term. Indeed, "some" members said in the July minutes that the risk of inflation rising above the target in the medium term had risen. In other words, we do not expect the BoE to push back on the recent upward move in interest rates," BofA adds.
3- "Our call is for the first 25bp BoE hike in February next year, followed by hikes of the same magnitude in August and November," BofA projects.
FX: New paradigm may bring higher vol.
4- "In FX, the impact of Super Thursday has already been felt as the GBP options market has priced in a premium for 6 August particularly in EUR/GBP. As we move into a new paradigm for Bank of England policy communication, a certain amount of adjustment is likely for the FX market as it becomes accustomed to this new format and “what to look out for”," BofA argues.
5- "Given the vast amount of information that will become available at the same time, the initial GBP reaction therefore may not necessarily be the right one in the first few instances and in some regards “Super Thursday” could turn into the UK version of US non-farm payrolls day as one of the most significant trading days for the pound. As such, we would expect GBP volatility to be elevated each quarter when the Minutes and decision are accompanied by the release of the Quarterly Inflation Report," BofA projects.
6- "What will matter for FX markets from the variety of BoE releases is the voting pattern and the extent to which some members’ decisions were “finely balanced” from the Minutes and the medium-term inflation projections based on current and market-based rates from the Quarterly Inflation Report. We would isolate these themes as focal points for the currency," BofA argues.
7- "Given the recent rhetoric from the BoE, and David Miles in particular, there is likely to be some market expectation that he has voted for a rate hike to make it a 6-3 decision. Any disappointment on a 7-2 should, however, prove short-lived as Miles is due to leave at the end of the month thus diluting the impact of his decision in any case. More important will be the first public utterances of the newly appointed MPC member Gertjan Vlieghe who will take up his position on 1 September. However, with the decision to hike rates coming into “sharper relief” at the turn of the year, we remain GBP bulls and expect the pound to rally into the start of a rate hike cycle as it has historically done," BofA adds.
EUR/USD: Trading the Final US GDP
US Final GDP is a key release and is published each quarter. GDP reports measure production and growth of the economy, and are considered by analysts as one the most important indicators of economic activity. A reading which is higher than the market forecast is bullish for the dollar.
Final GDP is the final of three GDP versions. Traders should pay close attention to the GDP release, as an unexpected reading could quickly affect the direction of EUR/USD.
US Preliminary GDP posted a strong gain of 2.1% for Q3, ahead of the estimate of 2.0%. Final GDP for Q3 is slightly lower, with the estimate standing at 1.9%.
Sentiments and levels
The historic Federal Reserve interest rate hike has sharpened monetary divergence with the ECB, especially with the easing steps the ECB took at its last meeting. So, the overall sentiment is bearish on EUR/USD towards this release.
Technical levels, from top to bottom: 1.10, 1.0925, 1.0880, 1.08, 1.0710 and 1.0630.
- Within expectations: 1.6% to 2.2%: In such a scenario, EUR/USD is likely to rise within range, with a small chance of breaking higher.
- Above expectations: 2.3% to 2.7%: An unexpected higher reading can push the pair below one support line.
- Well above expectations: Above 2.7%: A strong reading would likely boost the dollar, and the pair could break below a second support line as a result.
- Below expectations: 1.1% to 1.5%: In this scenario, EUR/USD could push above one resistance level.
- Well below expectations: Below 1.1%. A weak gain could result in the pair pushing above a second resistance line.