Market Views For 2016 - page 8
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CAD, AUD Soar Vs USD as Select Commodities Rebound - Analysts The Canadian and Australian dollars soared versus the U.S. dollar in recent sessions, underpinned by a sharp recovery in select commodities, namely oil and iron ore.
The loonie earlier Monday posted high levels last seen in mid November, while Aussie posted highs last seen in July 2015.
This comes as West Texas Intermediate crude prices rise nearly to the highest levels of the year and iron ore prices for delivery to Qingdao, China rose to the highest levels seen since June 2015.
Dollar-Canada holds at C$1.3285 in afternoon action, on the low side of a C$1.3262 to C$1.3377 range.
From the peak of C$1.4690 to today's USDCAD lows, the loonie has risen 9.7%.
This compared to the 46.3% rally seen in WTI, from its 2016 trough of $26.05, seen Feb 11, to today's high of $38.11.
A decisive close below the 200-day moving average in USDCAD, currently at C$1.3298, would be deemed bullish for the loonie and suggest scope for a move towards the psychological C$1.3000 mark. This is the first time since September 2014 that USDCAD has traded below its 200-day moving average.
There are old lows near $1.3030-50 from October and November 2015, that will act as support ahead of that.
The Bank of Canada holds a monetary policy meeting Wednesday and the market looked for the overnight target rate to remain steady at 0.50%.
Nevertheless in light of the sharp rise oil prices and the loonie, the market is keen to hear what the central bank has to say about the Canadian economy and these phenomena.
Charles St Arnaud, currency strategist at Nomura, reminded that with the BOC "clearly signaling that the upcoming fiscal stimulus was the reason they leave rates unchanged in January," the central bank "is unlikely to consider changing its policy rates until the fiscal stimulus is announced."
Therefore, Nomura maintained that the BOC will keep policy steady at 0.5% this week.
"Moreover, because of the comments from the BOC at the January meeting, it seems that fiscal stimulus is expected to be sufficiently big to allow the Bank to stay on the sidelines and, as such, we believe that the BOC is likely to keep rates unchanged in 2016," St. Arnaud said.
In addition to Wednesday's post decision press conference, BOC Governor Stephen Poloz will be making introductory remarks at an event Thursday for the Canadian Institute for Advanced Research and the Conference Board of Canada Ottawa, ON. The remarks will not be published on the BOC's website.
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BOE hike pushed back to 2017 in latest Reuters poll Q1 2017 is the latest target for the first BOE hike
Further and further back they go. This brings them mostly inline with many banks and institutions (who are part of the poll anyway). This sentiment among the market is going to make it hard for the pound to really run away to the upside.
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EURUSD would hit parity on Brexit says SocGen Societe General's global strategist, Kit Juckes, makes the first reasonable case why the euro might go to parity
People have been calling EURUSD to parity for a couple of years now and they've not even come close. Most opined that the Fed tightening, the ECB easing, and Europe imploding would be the causes but the target remains more than out of arms reach.
In his latest note he says that the UK voting to leave will be negative enough to knock EURUSD down to parity this year, and cable under 1.30.
While he sees the ECB giving it a helping hand lower on Thursday, he makes a great point in that the current bouts of risk aversion also include worries about Europe's immigration problems and Brexit fears. This, he says, is hindering the usual safe haven flows into EUR.
I don't think the market is really ready to grasp the full effects of a UK exit on the euro yet, and the main focus has been on the pound. Parity calls have come from far and wide and I'd love it if, after all prior reasons given, it was the little old UK who finally sent it there.
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JPY Into BoJ - BNPP BNP Paribas expects the BoJ to leave policy on hold on Tuesday.
"While likely to take further action later in the year, particularly if the JPY begins to strengthen again, our economists suspect the central bank would prefer to observe the effects of the January measures as they play out through portfolio rebalancing channels," BNPP adds.
"EURJPY has corrected sharply higher in the aftermath of the ECB meeting, reversing some of the JPY’s notable outperformance earlier this year. We think this can extend further and remain positioned for further upside in the cross via a risk reversal," BNPP argues.
US CPI (FEB): Implications & Actions The Fed’s first rate hike relied on the theoretical link between strong employment and accelerating inflation, but now that prices seem to actually be heating up, policymakers can point to early signs of actual progress on the inflation front. Despite headline prices being restrained again by weak energy prices, core inflation in February reached its highest level since mid-2012.
Implications & Actions
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US Fed cuts 2016 GDP forecast to 2.2% vs 2.4% prior. Dots point to 2 more hikes in 2016 US Fed economic forecasts from the February 2016 FOMC meeting
Unemployment
Core CPI
Where To Sell EUR/USD? The single currency has been capped since Friday’s comments by ECB chief economist and Executive Board member Praet. He stressed that the central bank still has room to cut interest rates should the euro area’s economic recovery falter. Nevertheless, it must be noted too, that Praet did not contradict Draghi. Even if Draghi indicated, that more cuts are unlikely, such a view was based on the assumption that the growth and price outlook improves. Since the ECB eased monetary policy by more than expected, inflation expectations as measured by 5y inflation swaps failed to improve.
It appears that the single currency’s recent appreciation has been preventing price expectations from rising. Even if the ECB wishes to be less driven by markets, it remains to be seen how central bank members will react should inflation expectations fall back close to historic lows.
As a result to the above outlined conditions we remain of the view that EUR upside is limited from the current levels. While we do not exclude that the EUR will reach levels closer to 1.13-1.15, we believe that rallies should be sold.
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BARCLAYS: Extreme financial market volatility is here to stay It’s been an eventful period for financial markets so far in 2016. The first six weeks were tumultuous to say the least. Risk assets were pummeled, dragged down by fears for the global economy, led primarily by China.
However, like a switch was flicked, sentiment turned around dramatically from mid-February. Risk assets soared, the global economy — only weeks after it was about to implode — was looking good once again.
Chalk and cheese. A game of two halves. Jekyll and Hyde. No matter your description, it’s been a wild ride for investors.
To Ajay Rajadhyaksha and Michael Gavin, researchers at Barclays, it was an eventful quarter in which not much of fundamental significance changed.
“It would be intellectually satisfying to attribute this round-trip to some threatening macroeconomic factor that loomed much larger at the start of the year, and then faded in the remainder of the quarter,” said the pair in a research note released earlier this week.
“But we find it hard to rationalise the market’s intense oscillations on the basis of actual news flow.
“The world looks to us broadly as it did at the end of last year, and not radically different than in mid-February.”
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Financial Conditions Ease, But Risks Ahead - Goldman Sachs Looking back to the mid-February inflection point, market sentiment has since started to improve with regard to the growth outlook, with financial conditions subsequently easing also. Growth views continue to make progress, as manufacturing data in the US seem to have turned the corner. The February US ISM ticked higher, regional surveys have shown incremental improvement on top of that, and the more-forward-looking new orders to inventory ratio suggests that there may be more room to run.
At the same time, the easing in US financial conditions has extended, accelerating since the FOMC meeting. Over the last week, the degree of easing in US financial conditions has been quite large, ranking in the 95th percentile, historically, with nearly all sub-components contributing to that easing and moving by similarly large amounts. Although we had been concerned that an improving growth outlook would give way to restrictive rate views it seems as if accommodative policy is helping to fuel markets alongside a better growth outlook. Indeed, market focus on the impact of an easing in US financial conditions has picked up recently, with relative returns across global equity indices and across (trade-weighted) currencies driven by relative exposure to easier US financial conditions. More broadly, over the last week, as financial conditions have eased, yield declines have coincided with a pick-up in the S&P, indicative of an easing shock working through the system as opposed to a growth shock. This stands in contrast to Europe, where, despite a small decline in yields, growth views have stumbled and equity markets have not been as buoyant.
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JPY To Be A Loser Over The Remainder Of The Year: Where To Target? Even more so than in the euro area, recent monetary easing has failed to lead to a weaker currency in Japan. The yen is now at its strongest level since 2014, only months after the Bank of Japan introduced negative rates on a portion of deposits held at the central bank.
There is, however, reason to believe that the yen will weaken over the course of the year.
The central bank remains in a position to double down on negative rates and take them all the way down to -0.5% around mid-year. Indeed, the BoJ’s minutes underline the view that the nation’s central bankers favour quantitative and qualitative easing and negative rates working in tandem to stimulate the economy.
It’s even likely that, given the disappointing economic performance, fiscal policy will need to support monetary policy, despite Japan’s unfavourable debt-to-GDP position. With the yen already relatively strong and the economy failing to produce significant signs of improvement, divergent monetary policy expectations with the Fed will stand out and see the yen be one of the few currencies to depreciate against the US dollar over the course of the year.
Indeed, net JPY longs remain around levels not seen since 2008, leaving room for a reversal, while Japanese investors have returned to buying foreign bonds at a pace not seen since 2010.
As a result, look for the yen to gradually head back toward the 120 level by the end of 2016.
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