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FX markets broadly driven by the USD

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As widely expected, the RBNZ maintained its official cash rate unchanged at 3.50% and revised lower its growth and inflation forecasts. The NZD is still seen overvalued, yet satisfactory at current levels. The kiwi lost 18.5% over the past 8 months against the US dollar. NZDUSD rebounded from 0.7200 to 0.7383 post-RBNZ. Sentiment should turn positive should 0.7385/0.7400 barriers are cleared before the week close. The negative impacts of baseless news on Fonterra’s baby milk contamination continues weighing on dairy exports.

The USD appetite continues dominating the FX markets. The US 10-year yields finds support above 2%, while the DXY index tests 100 for the first time since March 2003. The rising risk is the Fed keeping its “patient” rhetoric at next week’s meeting. Then the relief rally should immediately reverse short-term dynamics in G10, high-beta and EM currencies that have been struggling at deepening oversold conditions since last week’s NFPs.

EUR/USD could hardly fall faster after Mario Draghi’s (unsurprising) comments on the QE. The pair hit 1.0495 overnight as buyers are obviously outweighed by fundamental and speculative shorts. With the broad target set to parity, traders should continue find opportunities in rallies to strengthen their short-EUR/USD positioning.

As suspected, 0.70 support remains challenging for EUR/GBP-bears. As the GBP-negative sentiment spills over the market on pre-election talks, GBPUSD eases to 1.4893, lowest since Jul’13. The bias remains on the downside with vanilla puts trailing below 1.4950/80 area. The key support stands at 1.4814 (Jul 9th 2013 low).

USD/CAD tested fresh 6-year highs (1.2799) as the WTI crude legged down to $47.33 in New York yesterday. The MACD (12, 26) stepped in bullish zone suggesting fresh interest in USDCAD longs. Vanilla calls trail above 1.2650/1.27 and should give support before Friday’s labor data. The expectations are soft, therefore keeping the divergent BoC/Fed bets in charge for further loonie weakness verse USD.

In Brazil, the BCB minutes are due today and investors focus on bank’s comments about the accelerating consumer prices. The minutes will likely fall short of BCB hawks, while the central bank will doubtlessly leave the door open for further Selic rate hike given that it has little option other than conducting an aggressive, tight monetary policy to make sure to not lose control over the inflation diverging significantly from the BCB’s target. Indeed, the concerns on Rousseff’s ability to restore a fiscal discipline, the substantial depreciation in BRL combined to hawkish Fed expectations require tighter monetary policy, as the economic slowdown remains a major issue. There is the dilemma. The Congress postponed vote on the budget bill to March 17th.

In Turkey, the Lira pares losses verse EUR and USD as discussions between President Erdogan and Turkish Central Bank Governor Basci go smoothly. As policy makers agreed to maintain the “current environment of confidence and stability”, implicitly meaning that the Lira rates will likely remain unchanged at next week’s meeting, the risk lovers immediately jumped into Lira longs to take advantage of the rate spread. Despite his explicit craving for lower rates, President Erdogan certainly knows that going aggressively against the market would only generate the opposite outcome. As was the case a year ago. The reluctance to adjust the policy rate to market expectations ended in an aggressive emergency rate hike in January 2014 (the benchmark rate was lifted from 4.5% to 10%). And such a scenario is understandably all but wanted three months ahead of Turkish general elections. For high risk profile traders, short-maturity carry positions in EURTRY become interesting. We remain flat on USDTRY on hawkish Fed bias. Carry unwind risks. With the one-week realized volatility spike above 20%, the risk of a carry unwind should be considered at all times a short EURTRY position is opened. The risk of reversal is preeminent especially in case the agreement with Greece is reached.

Today traders focus on: German, French and Spanish February Final CPI m/m & y/y, Swedish February Unemployment Rate, UK January Trade Balance, Euro-Zone January Industrial Production m/m & y/y, Canadian 4Q Capacity Utilization Rate and February Teranet/National Bank HPI m/m & y/y, Canadian January New Housing Price Index y/y, US February Retail Sales m/m, US March 7th Initial Jobless & February 28th Continuing Claims, Us February Import Price Index m/m & y/y, US January Business Inventories, US 4Q Household Change in Net Worth and US Monthly Budget Statement.

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