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Daily Commentary – Forex Analysis 26/03/15

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• 1.10 holds againOnce again the 1.10 barrier proved too much for EUR/USD. Despite more encouraging European data (better-than-expected Ifo survey) and disappointing US data (worse-than-expected durable goods orders), the pair spent only a few minutes above the 1.10 barrier before coming down. We seem to be getting ready for another challenge of that line again in early trading this morning. Nonetheless, the fundamental background is slightly different as the bond market yesterday ignored the weak US data. Fed funds rate expectations rose by 3 bps yesterday while bond yields were up 4-5 bps across the curve and inflation expectations also rose, perhaps because of the rise in oil prices (see below). Meanwhile the FX market appears to be settling down and reaching more of a consensus as shown by the narrower and narrower trading range for EURUSD each day: 3.99% last Thursday, 2.53% Friday, 1.74% Monday, 1.27% Tuesday and 1.04% Wednesday. The big question is which direction the market will break out on: 1.1045 or under 1.0885 (see technical comment for details).

• Oil surges on Saudi airstrikes Oil prices initially fell Wednesday after the US Energy Information Administration (EIA) confirmed yet another rise in oil inventories, but then the market turned around and prices rose sharply on news that Saudi Arabia started bombing targets in Yemen. The Saudi offensive raises the possibility that Middle East supplies could be disrupted. Yemen is not a big oil producer (it produces only 133,000 b/d) but at one end of the country lies the Bab el-Mandab straits, a 3.2km (2 mile) wide bit of water. An estimated 3.8mn b/d flows through this narrow stretch as oil tankers sail from the Persian Gulf to the Suez Canal. If it were to be closed off, tankers would have to sail around Africa to reach markets in Europe and the Americas, adding many days to the journey and raising the cost of transport considerably.

• My view though is that in recent months we have seen numerous threats to Middle East supplies, such as the collapse of Libya and ISIS’s advance in Iraq, and so far supplies have only increased. I’m going to be optimistic and assume that this time too it will be a false alarm. Meanwhile, US inventories just keep climbing and climbing, as the latest data showed. At the current rate, storage at the main US loading port of Cushing, Oklahoma will be full by the end of June. Then what? Nothing to do but to dump the oil on the market at any price. So assuming that the Saudi foray does not result in any disruption to supplies, I expect prices to hit new lows within the next several months. However, it’s impossible to tell when the market will turn from worrying about the fighting to worrying about storage again. It depends on how the fighting goes, which nobody can predict.

• Nonetheless, the increased tension in the Middle East is likely to weigh on currency markets. AUD and NZD were the worst performing currencies overnight as risk aversion hit the market, while JPY and the oil-sensitive NOK and CAD gained.

• Today’s highlights: During the European day, we get the final GDP figures for Q4 for France. Since the final data is expected to confirm the preliminary growth figure, the market reaction could be limited as usual.

• Eurozone’s M3 money supply is forecast to have risen 4.3% yoy in February, a slight acceleration from 4.1% yoy in January. The 3-month moving average is expected to accelerate if the forecast is met. We could also see bank lending turn positive on a yoy basis for the first time since March 2012. Such figures would suggest that the ECB’s preliminary measures to boost money supply growth, such as the targeted long-term refinancing operations (TLTROs), were already taking effect even before the QE program began in March. It would add to the recent data indicating a nascent recovery in the European economy.

• In Norway, the AKU unemployment rate for January is forecast to have remained unchanged at 3.7%. The official unemployment rate for the same month had increased, thus the possibility for an increase in the AKU unemployment rate is high, which could prove NOK-negative.

• In Sweden, the trade surplus for February is expected to increase a bit. This could strengthen SEK somewhat.

• In the UK, retail sales for February are expected to rise, a turnaround from the previous month. This could strengthen GBP, at least temporarily, as rising retail sales in the UK are generally associated with a stronger pound. It’s not clear though whether economics is dominating the pound nowadays or politics. Or maybe it’s being swayed by comments by Gov. Carney and his friends about the likely path of interest rates.

• In the US, we get initial jobless claims for the week ended March 21. The preliminary Markit service-sector PMI for March is also coming out.

• We have several speakers on Thursday’s agenda: St. Louis Fed President James Bullard, Atlanta Fed President Dennis Lockhart, ECB President Mario Draghi and Bank of Canada Governor Stephen Poloz speak.

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