Euro Seen Rangy In N-Term; HICP, NFP Data To Drive - Analysis

Euro Seen Rangy In N-Term; HICP, NFP Data To Drive - Analysis

29 March 2016, 22:53
Vasilii Apostolidi

The euro was expected to remain in a rough $1.1100 to $1.1400 in the near-term, despite the event risk stemming from various key global data sets due out this week.

There are mixed views about the bigger picture, with much hinging on when the Federal Reserve will raise interest rates again.

The euro held at $1.1288 Tuesday afternoon, on the high side of the day's range of $1.1169 to $1.1293.

On the day, the pair was underpinned by a softer dollar, which tracked the decline in U.S. Treasury yields seen in the wake of deemed dovish commentary by Fed Chair Janet Yellen.

This month, the euro has traded in a $1.0822 to $1.1342 range, with the low seen March 10 as the initial reaction to the European Central Bank's aggressive easing action. ECB President Mario Draghi's March 10 press conference that followed, suggesting that eurozone yields may have bottomed for now, sparked a quick turnabout in bearish euro sentiment.

The March EURUSD peak was seen a week later, a day after the Fed released its Summary of Economic Projections (SEP) or so-called dot-plot, suggesting that there may be only two rate hikes in 2016.

This surprised those looking for three hikes this year in light of positive U.S. employment data and some suggestion of an uptick in inflation.

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Since peaking in mid March, the euro made slow progress lower, weighed by risk aversion in the wake of the Brussels terror attacks as well as pre-Easter holiday paring and squaring.

Tuesday's euro spike higher has been driven by narrowing interest rate differentials, with ten-year U.S. Treasury yields breaking today below last Thursday's lows near 1.856%.

The market nevertheless favored a euro short looking for eventual U.S. outperformance.

"Despite yesterday's hiccup in the U.S. data-flow, our bias remains positive-USD and we note that, ahead of yesterday's releases, our US economic surprise index hit a 17-month high," said Adam Cole, head of G10 FX strategy at RBC Capital Markets.

While the U.S. equity rally seen in March "would typically be associated with USD selling into month-end," RBCCM finds no evidence that this "is significant in EURUSD," but rather sterling "is the largest beneficiary, followed by AUD and CAD)."

More importantly, there is "growing evidence that higher European equity prices are associated with month-end EUR selling," Cole said.

Going forward, the euro "would also be vulnerable to spill-over if concern on UK EU exit risk picks up again (the bookies implied probability has fallen to 34% today), if post Brussels attacks opinion polls show a rise in anti-EU sentiment (none have been released so far)," he said.

RBCCM's "trade of the week" is a euro short, with a stop-loss at $1.1310 and a downside target of $1.1000.

The German DAX closed up 0.37% at 9,887.94 Tuesday. At the close, the index remained down 8.0% year-to-date. However, the DAX was up a respectable 4.1% from the 9,495.40 close seen on Feb. 29.

This compared to the S&P 500, at 2,054 currently, which is up 6.3% from the 1,932.23 close seen on Feb. 29.

In March, global investors took a new look at U.S. and eurozone stocks, even as they exited Japanese equities.

According to BOA Merrill Lynch's monthly fund managers survey, taken March 4 to 10 and released March 15, a net 13% of fund managers were underweight U.S. stocks, compared to a net 19% underweight in February and a 15% underweight in January.

Allocation to eurozone equities increased to a net 41% overweight in March from a net 36% overweight in February and compared to a net 51% overweight in January. Fund managers had a net 55% overweight back in December.

It has not been uncommon for world investors into the eurozone to hedge the FX risk of their equity purchases.

This is why when the the DAX tumbles on investor selling, the euro is often underpinned and vice versa, analysts said.

There is event risk this week from two key data sets, flash EMU HICP inflation data for March, due out Thursday in the eurozone and in the U.S., set for release Friday.

As a reminder, on Feb. 29, in response to soft flash EMU HICP inflation data, 10-year German yields fell to a low around 0.101%, the lowest level since last spring, on expectations of ECB easing. As a reminder, Bund yields posted a record low of 0.0485% April 17, 2015.

On the last day of February, the euro was weighed by lower eurozone yields, hitting a low of $1.0859 that day, and then bottoming a few day's later on March 2, at $1.0826, before recovering to $1.1043 on March 4, U.S. non-farm payroll day.

MNI's median estimate for flash eurozone HICP is -0.1% year-on-year, compared to -0.2% in February. Germany's HICP (MNI median +0.6% month-on-month and -0.2% year-on-year) is set for release Wednesday and will set the tone for expectations for Thursday's EMU release.

On the U.S. jobs front, MNI's median looks for March non-farm payrolls to rise by 196,000, for an unchanged unemployment rate of 4.9%, and average hourly earnings of +0.2%.

The market will also eye backward revisions and any change in the participation rate.

Ahead of the U.S. data, the market will eye the release of key manufacturing data in China (CFLP and Caixin) as well the Japan's quarterly Tankan.

In 2016, the euro has seen a range of $1.0711, seen Jan. 5, to $1.1376, seen February 11, with the high seen at the peak of risk aversion as ten-year U.S. Treasury yields hit lows near 1.530%, low levels last seen in 2012.

Traders generally favored the pair holding a $1.1000 to $1.1500 range for now and saw little likelihood of a return to a $1.0500 to $1.1000 range until after the Fed begins raising interest rates more aggressively.

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