Why is the euro rallying?
EUR/USD: Turning Bullish N-Term: Range & Outlook - BTMU The euro has finally broken higher against the US dollar rising back above its average from over the last year at around the 1.1000-level, notes The Bank of Tokyo Mitsubishi UFJ (BTMU).
"Global investor risk sentiment continues to remain fragile creating a more supportive environment for current account surplus currencies like the euro.
However, the jump higher in EUR/USD was mainly driven by broad-based US dollar weakness. The US dollar has been undermined in the near-term by heightened concerns over the economic slowdown in the US. The weaker than expected ISM non-manufacturing survey signalled that the US economy has likely slowed further early this year. It has also cast doubt on the resilience of domestic demand while external demand remains weak. The US interest rate market has shifted to discount almost no further rate hikes from the Fed this year.
The US dollar is likely to remain vulnerable in the week ahead although weakness already appears to have overshot somewhat in the nearterm. The release of the non-farm payrolls report for January will be crucial for US dollar performance in the week ahead with risks skewed to the downside," BTMY argues.
BTMU is bullish on EUR/USD around current levels seeing the pair trading in a 1.1000-1.1450 range in the near-term.
Talking of intervention have we just seen the SNB back in ? The Swiss National Bank have been noticeably absent from the fray lately. Something I've been highlighting this week as CHF safe-haven demand has returned unchallenged to post 0.9661 and EURCHF down to 1.0950 earlier today before spiking around the same time as the surge in USDJPY.
5Magics also makes the observation in a comments thread and there is some merit in suggesting we could be seeing some more smoothing with USDCHF now 0.9718 and EURCHF 1.1030.
Part of this move though can be attributed to general euro demand and the sharp rise in EURJPY with CHFJPY lagging behind.
Either way I remain of the view that the SNB are watching very closely.
EUR: Not Your Father's Systemic Risk Repricing - Goldman Sachs Credit market indicators of European systemic risk appear to have inflected as well. Since widening last week to levels not seen since the Euro crisis in 2011-2012, the cost of credit protection as measured by the iTraxx index for European Senior Financials fell by 8bp for the second day in a row (to a spread of 123bp from 139bp last Thursday).
In our view, the repricing of systemic risk was overdone (and the rally has further to run). Owing to higher capital levels for banks as well as the new backstop facilities such as the LTRO, T-LTRO and ELA, we do not think the recent capital-raising pressures on banks are likely to cause the sort of short-term funding pressures they caused during the European sovereign crisis.
...For one, banks are better capitalized, and have far better access to liquidity and short-term funding. Consistent with this view, the recent pressures on bank credit spreads are not particularly visible in the availability or pricing of short-term funding spreads. Rather, the repricing is primarily visible in equities, capital securities and senior bonds. In other words, we have seen an increase in the cost of long-term capital, including a repricing of senior credit risk, but with confidence that banks have access to short-term funding. Pressures on long-term capital costs are evidently rising, but the secure access to short-term funding renders these pressures less systemic.
A second reason for pushing back on systemic fear goes to the source of these concerns in the first place, namely, growth.We think the growth outlook is better than many market participants appear to believe, and in contrast to those who think recession is imminent, our estimates of the year-ahead risk are only slightly higher than average (in a range of 15-20%; We therefore think that the recent rally in yields will struggle to sustain itself. Indeed, our economic surprise ('MAP') index for the US has been rising for most of 2016, and we think rising wages can sustain consumption growth and housing demand while a more expansionary fiscal policy and favorable inventory cycle should outweigh global headwinds.
EUR/USD: Going Bearish Next Week: Range & Outlook - BTMU The euro is slowly drifting lower again after breaking above the 1.1000 level in early February on the back of the escalation in financial market turmoil, notes Bank of Tokyo Mitsubishi UFJ (BTMU).
"While last week was about increased concerns over the European banking sector and concerns over global growth, this week has seen banking sector fears ease – the Markit iTraxx Europe Subordinated Financial Index has retraced over half of the climb that began in February as fears over funding ease.
The announcements this week on “financial support” for certain troublesome industries in China and the oil production freeze deal between Russia, Saudi Arabia and Iran will go some way to alleviating market risk aversion. That would suggest scope for further declines in EUR/USD next week.
There is little in the way of key macro-economic data releases to fuel volatility and hence the currency pair is likely to be more driven by broader financial market conditions. There are no senior ECB officials scheduled to speak next week either, apart from ECB Council member, Peter Praet, next Friday at 18:30 GMT.
Hence, the current improving financial market conditions lead us to go with a bearish bias on the simple assumption that this bout of improved risk appetite will run into next week," BTMU argues.
In line with this view, BTMU is bearish on EUR/USD going into next week seeing the pair trading in a 1.0950-1.1450 in the near-term.
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What has changed now to cause the euro to rally?
Absolutely nothing, post finished.
I suppose I should clarify that further shouldn't I?
Whenever we get a sudden big move or a surprise we always want to know the reason. For me it's easier (at first) to try and not get bogged down in the minute details. Take Drgahi's speech. It only had a minor effect today. If anything the euro rose because every time he speaks the market expects a very dovish remark. I didn't see any additional dovish comments, and in fact, it could be construed as being hawkish when he said that inflation is bogged down by global forces. That comment shows recognition that the ECB can't fight all inflation with policy. But there I go getting into those minute details. The euro hasn't risen 90 pips on that. It is rising because it's a continuation of what happened yesterday.
When markets were having their Jan blowout, China was one of the main reasons cited. I happened to think that there was also a fair bit of adjustment after the Fed hike. That really confirmed the end of the free punch bowl and many players changed tactics and positions to reflect one of the major central banks entering a tightening phase. That's a pretty big deal at anytime and a fact I think many ignored. When USDJPY traded down to 116.00 in Jan EURUSD was doing nothing around at around 1.0850-1.0950.
This time it's different. This time it's all about the dollar and it's become all about the Fed. Yesterday the services and ISM data was rubbish. Manufacturing on Monday was rubbish. Last Thursday's durable goods was rubbish. The thing is, we've all been noting it's been rubbish for a while but most of the market has been ignoring it as they chased the Fed hike, even though it was data dependant. How crazy is that?
It's been my long held belief that the Fed needed to hike to get rates off the floor because it was becoming too dangerous for them to stay so low. They did that and did it on two of things that are in their mandate, jobs and prices. They've got a strong jobs market and Core CPI at 2.1%. 2 out of 3 of the mandate that will lead to 3 out of 3 when they get "moderate long term interest rates". Number 3 is where the problem is now.
So here we are. The market is actually trading normally, where good data means hikes and bad data means cuts. The euro isn't up because Europe is doing well or monetary policy is changing, same for the pound and aussie etc etc. Right now this is 95% about the US and therefore USD. Right now bad data can't be ignored.
Forget correlations
I've never really looked out for correlations in trading. It's a mental thing that some people need because they think that if they find one, it helps them know where a market is going to go. It's crap because you've got to know where one part is going before knowing where the other part is going to go. If you knew where part one was going to go you'd trade it and forget about part two. All it does it give us two instruments to guess where they might go.
I understand the standard everyday correlations like oil vs CAD. Those correlations don't change. Their strength may ebb and flow but the relationship is constant, particularly in big moves in the underlying market (oil in this example). Things like the euro being a funding currency and correlating to stocks I ignore as they're not constant and are just too flaky to trust. So forget the temporary correlations and just trade what's in front of you. Have your bias via the tech or fundamentals, whether it's Draghi, dovish or hawkish, the US economy, good or bad and trade your instruments without the noise. It doesn't matter what the news is, either a level will break or hold, and that's all we really need to focus on and all we need to trade.
For the euro, it can go anywhere it likes. It's been ranging for ages and now it's broken out. We can't predict the news and we can't predict the next direction. All we can do set our sails to the news and data winds and watch the charts to see where the clear or rocky waters are.
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