Investors remain wholly unconvinced about the dollar and the Fed. Some of this ‘big’ dollar move left has been about front running month-end related requirements, while others have seen it as a natural cooling off of an over exuberant one directional dollar trade that’s been supported by a record US yield curve climb. Today, US investors wait for a data release that should shed more light on whether the Fed will begin tapering its bond-buying program. So far it’s been about follow the equity market and the European sector is holding up relatively well despite another soft night from their Asian counterparts that had USD/JPY testing a three week low (¥100.58).
Investors are looking forward to this morning’s US initial jobless claims, the second release of Q1 GDP report and pending home sales for some fundamental leverage. Consensus’s has jobless claims reporting a stable reading at +340k after last weeks sharp decline. The market is expecting the US GDP release to confirm the market’s initial reading of +2.5% quarter-on-quarter expected print. However, a few investors foresee the Q1 GDP being revised down a point or two, while claims may stride higher above the psychological +340k consensus. Under this scenario, the dollar would be expected to struggle against making further gains against the EUR and other commodity supported currencies.
The IMF remains hard at it. Yesterday, the global agency happened to reduce China’s growth projections, lowering its forecasts for China’s GDP growth this year from +8% to +7.75%. That ½% decline is the size of a relatively small to medium size economy. The revised forecast comes only days after Chinese Premier Li Keqiang re-iterated that the “government’s priorities remain firmly focused on addressing key structural issues and tolerating moderated rates of headline growth.” The Chinese leadership has again outlined that the “new” leadership expects “reasonable growth” to maintain about +7% by 2020. This pace is lower than the 7.5% previous target for 2013.
Europe did not escape the IMF’s clutches. The agency too has downgraded most of Europe’s growth expectations – by paring back the OECD its growth forecasts for the Eurozone and supposedly prompted the European Central Bank to consider doing more to lift economic activity similar to the Fed and BoJ. OECD expects growth in the region to contract by -0.6% this year, while, the EC has given France two-more years to complete its austerity program after the country dipped into recession in Q1. Any late upward GDP swing may not be enough so save the dollar – month end requirements are beginning to firmly root. It seems that at this point only the recalibration of US interest rates higher will support the dollar. Dollar longs had reached some extreme readings, the CoT data showed new record longs. Under this position, extreme readings like this would also suggest that the dollar has more corrective weakness to undertake.
The Italian treasury this morning issued its full allotment of BTP’s in the 06/18 auctions, while the 05/23 displacement received less than the average number of bids. Prior to the issue the BTP prices were a tad softer going into the auction – as to be expected. Overall, the results remain healthy and asset trading should remain better bid as the +18.3-billion of redemptions will mostly go forward and provide some further underlying support.
Interest rates and the yield curve have dominated currency direction so far this week. This has allowed the single 17-member currency to back off from its relatively shallow outright price lows (established yesterday) and even contemplating taking on 1.30 this morning. Investors have embraced rate watching as a primary source for currency direction. Currently, it’s either a central bank rate announcement or the shape of a particular domestic yield curve that has interest rates greatly influencing the demand or supply of a particular currency.
The ‘greenback’s’ strength had been one of this week’s top themes. It’s not so much a move to high yields in US treasuries (BoJ look out) that is stoking the mighty dollar to scale new heights. According to fixed income traders it all about the “notable break in the shape of the yield curve” that is changing the forward price of money that is affecting the investor’s decision practices. This market can expect fixed Income to lose its glitter sometime soon. All that glitters is not always golden! Despite the ECB’s tentative opening to negative interest rate suggestion this week, analysts note that the EUR’s trade weighted index has moved relatively sideways over this past month. Currently, given the strong upside momentum for the green back (general overall market support), any weak survey data risks pushing the EUR/USD back down to familiar weaker territory. Despite the EUR popping it head just above the figure (1.3006) – motivated by a plethora of stop-losses, the risks remain on the downside. The EUR needs to firmly break 1.3080 to neutralize the single currency bearish outlook.
Are Yields To Break The EURO’s Back?
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX