Currencies Wallow In No Mans Land

What news event is going to get the forex market to stand up and take note? The remainder of this week is probably confined to a tight currency range with market participants continuing to look for the various reasons why currency pairs are moving. Yesterday’s EUR bears were poised to commence a lap of honor, fuelled by hedge funding selling, only to find by day’s end that the 18-member single currency ended up trading north again of the psychological €1.3800 handle after testing last weeks low. Despite the EUR making a strong recovery in the last 24-hours the underlying negative outlook still remains. Mostly the Chinese President telling the US that a political resolution to the crisis in Ukraine would serve the interests of all sides fueled yesterday’s sharp gain. Dovish rhetoric from EU and ECB members flashing across the ticker that the EUR at €1.40 is too strong coupled with the Fed’s hawkish stance should be capable of confining EUR rallies to a minimum. Initially, the markets conviction for a higher dollar and sooner than expected Fed hikes did start out strong, however, it seems to have flittered away since. Expect more traders to remain sidelined, looking to the next big data point for inspiration.

This morning’s German Ifo data has left the single currency in the doldrums. The German Ifo index has come in at 110.7, modestly weaker than the market expected 111 print. The bulk of the weakness is due to the “expectations index” which is presently being dominated by the global outlook having become less certain as worries over China and Russia intensifying. The breakdown revealed that the current conditions index actually surprised to the upside – this is what the market should be focusing on when gauging what’s happening in Germany (115.2 vs. 114.4). The Ukraine crisis appears to have been acknowledged in the survey but obviously not seen as a major headwind to German growth prospects just yet. For the EUR, only above €1.3920 would suggest a return to its recent high prints. Speculators remain reluctant to sell the EUR after losing heavily yesterday afternoon and after being burnt running long EUR positions into last week’s FOMC meeting. Many will likely consider shutting up shop and wait for next week’s key events (ECB, NFP), again leaving the currency pair vulnerable to liquidity constraints.

The tit-for-tat sanctions are widening. Earlier today G7 officials announced they would forego the planned G8 summit in Sochi this June in continued protest of Moscow annexation of the Crimea peninsula. Officials are hardening their stance following the swift Moscow-endorsed Crimea referendum as well as elevated concern over the presence of Russian troops amassing near the east Ukrainian borders. So far it seems that the Russian financial markets have shrugged off the news while the RUB continues to benefit from substantial seasonal tax payments. It would be interesting to see how much Russian interest has been behind keeping the EUR aloft in recent sessions.

The market should be more cognizant of “who says what” as official rhetoric continues to dominate most currency price moves, especially in Europe and Australia. The Aussie has been on a ‘tear of late,’ with real money demand being blamed as a factor in the last +25c climb higher. The currency pair seems to be eyeing market stops above the psychological $0.9160, last December’s high. For the techies, failure to sustain gains above these levels should leave the currency vulnerable to pressures from the downside. The RBA’s Governor Stevens is expected to speak on Wednesday in Hong Kong. Be forewarned, despite the frustrated efforts, Stevens continues to champion the cause for a lower AUD aggressively talking down his currency at most public opportunities.

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