Record EUR Shorts Looking to IMF for Clues

  • Beware of short trading week moves
  • BoE on two-month hiatus
  • Look to U.S. jobs for rate clue
  • Beware of weather-related anomalies in NFP

With Good Friday making it a holiday-shortened trading week for most currency traders, many would likely prefer to escape this month unscathed to begin the second quarter next week. However, with U.S. nonfarm payrolls (NFP) data rounding out the week, it may not be such an easy task to complete without experiencing some collateral damage.

Investors should be thankful that Group of 10 central bank activity does actually slow down considerably this week heading into the Easter break. In the U.K., the Bank of England’s policy members make it easy for investors: they have undertaken ‘self-exile’ during the U.K.’s two-month election season that is officially underway.

In the U.S., Federal Reserve members are very active on the talking circuit this week with Vice Chair Stanley Fischer speaking on Monday, and Chair Janet Yellen on Thursday. Neither is expected to give any interest rate hike clues away as both are giving introductory remarks at separate conferences. On Tuesday, Federal Reserve Bank of Richmond President Jeffrey Lacker speaks on the country’s economic outlook. This ‘hawk’ is unlikely to challenge consensus of a patient Fed waiting until September or even later for it to begin raising interest rates. By the end of this week’s Fed speech circuit, investors will probably be none-the-wiser as to when and how aggressive the Fed will be with respect to interest rates.

U.S. Jobs Data in View

Capital markets will probably need to take interest rate timing clues from this Friday’s U.S. NFP report. Ever since Yellen began the process of weaning investors off central bank dependence, and nudging the market toward fundamental data reliance, the U.S. jobs report has taken on much more significance. Especially since the U.S. economy has, of late, exhibited signs of a slowdown due to excessively cold weather. Many are looking for this past winter’s cold snap to have finally taken a modest bite out of NFP (expected +247,000 versus +295,000; unemployment rate unchanged at +5.5%). If that does not happen, it could reinforce how strong the underlying U.S. labor market truly is, and will have money-market traders pricing in an earlier rate hike. Investors should remain wary of any weather-related anomalies. For a more accurate rate guidance, look to the wage growth component of the report. Until now, there has been very little sign that a tighter labor market conditions are supporting wage growth.

Euro Traders Seek Direction

Last week, the EUR bounced around in a contained range twice threatening to breakthrough resistance at €1.1052, before falling back to this morning’s EUR/USD lows ahead of the psychological €1.0805 handle. On the international money market, speculative EUR short positions hit new records, suggesting more covering is likely. However, there is a clear market willingness to add or establish more EUR short positions on any U.S. dollar pullbacks. The EUR bear must be feeling fairly confident with their short positions, especially with the lack of EUR bounce follow through considering the depth of the record short positions.

Negative Yields Turn Investors Off

The “big” dollar requires a significant boost to provide the momentum to bring the world’s dominant reserve currency to the next level. Friday’s NFP is capable of providing that spark. But before then there is always the release of the International Monetary Fund’s (IMF) figures for the fourth quarter of 2014 on global foreign exchange holdings, known as the Currency Composition of Official Foreign Exchange Reserves (COFER). Due out tomorrow, and despite the report’s look backward, it does give investors a fresh perspective on how the world’s biggest currency traders (central banks) are embracing the dollar.

In the past 11 months, the USD has appreciated +28% versus the EUR. In the third quarter, the report showed a vast outflow out of EURs (down -1.5% to +22.5%) and into U.S. dollars (up +1.6%, the largest in 10 years). The record shift out of EURs was brought about after the European Central Bank lowered the interest rate on deposits. Europeans were “paying away” (negative rates) to deposit funds. Because of the U.S. yield differentials argument, investors want to purchase U.S. assets for their returns. The pace of the greenback’s rally has been the fastest in over 40 years. For some, the danger is that the dollar’s move has been too rapid and could be overdone in the short term. Reports like the IMF’s COFER could ignite market action one way or another.

Global Bourses on Firmer Footing

Over the weekend, Chinese policymakers were out in full force supporting their economy. People’s Bank of China (PBoC) Governor Zhou Xiaochuan expressed concern about the risk of deflation, potentially paving the way to another easing move as soon as next month. An orchestrated easing cycle in the world’s second-largest economy is helping global equities. Xiaochuan also noted China may update laws on currency controls, and that there is still room for more rate cuts. Separately, PBoC researcher Zhuo Chen warned that China’s first-quarter gross domestic product could fall below +7%. President Xi Jinping also spoke, downplaying the threat of economic slowdown, and reiterating the new normal in China justifies emphasis on “quality of growth over the size of expansion.”

Japanese Struggles Persist

In the eyes of the Bank of Japan (BoJ), industrial output has always been one of the brighter parts of the Japanese economy. Japanese policymakers only recently made consecutive upgrades in their assessments. However, in the overnight session, industrial production for February marked another instance of disappointing economic data, making this Wednesday’s quarterly Tankan survey particularly significant for the BoJ as it begins to enter the new fiscal year in Japan. Governor Haruhiko Kuroda, speaking over the weekend, said he expects inflation to begin accelerating in the fall. This would suggest there may be some reluctance at the BoJ to add to its already unprecedented stimulus measures.

If the IMF’s figures on global foreign exchange holdings or NFP do not provide that market spark this week, then investors could always look toward Greece to provide the unusual. Over the weekend, Greek Prime Minister Alexis Tsipras said he was confident there will be a happy ending to this week’s negotiations, however, other European Union sources are said to have indicated the latest Greek proposals are still missing sufficient detail, making it difficult to disburse new aid. The German press is speculating that “the institutions” (the Troika) see Greece missing its primary surplus target this year, even though the new government promised a +1.5% surplus. It is rumored the country will run out of cash by April 20.

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell