What’s with intraday forex volatility? Last week the market was teased and given a taste of times past after Draghi & company insinuated that Euro monetary policy is about to change come June 5th. So far, the ECB has been doing most of the lifting by defending the EUR, using a defensive tactic very much in line with the SNB – defend the €1.4000 psychological print. Perhaps this is the answer to the ECB’s forex dilemma – Do they need to formalize a EUR target? The ECB has managed to bring some intraday volatility back to the market, but will it last?
Other G7 Central Banks would not be too happy with this practice; nevertheless, the ECB has limited options. Their SMP sterilization could be seen as a token gesture and QE could be strongly resisted by Germany, the Euro’s backbone. On the next go around, cutting the refi-rate is not expected to affect the real economy, while implementing negative deposit rates is going to slash margins at euro-zone banks. Draghi has said that they will act in a few weeks if updated inflation forecasts merit policy easing. The ECB does not have an FX target, but when the 18-member single currency makes meaningful strides towards the €1.4000 handle the volume of ECB rhetoric tends to get that bit louder. Which seems to be the signal to the market that current EUR gains are enough.
Now it’s a waiting game that’s expected to be interrupted and peppered with a few volatile intraday’s. Expect euro-zone data to be more important during the wait for next months ECB meet. A bearish market wants reasons to sell but recent data suggests a broadening euro-zone recovery. The dilemma is that stronger data will numb any chance of a June ECB change in policy, mind you, so too does a lower EUR and a calmer money market. So far, the market reaction to a stoic ECB has hurt the EUR bulls – many have liquidated their long EUR positions, and given the many squeezes that have followed ECB meetings the market tends to looks to ‘short’ EUR positions.
The EUR remained steady throughout most of today’s Euro session, drifting to a one-month low (€1.3743) after a mixed German ZEW Survey. Investors are worried about Germany’s export led economy and think growth may be peaking. In today’s report, German investor morale plunges to the lowest level in 15-months (33.1 vs. 43.2). With more individuals expecting lower short-term rates managed to persuade the EUR to test 1.3740 with key support now seen at 1.3690. The ZEW questions the pace of growth, but does see positive underlying economic developments. Current levels – lower end of the April-May range €1.3643-1.3995 – are not hyper attractive to the EUR bear.
Many expect the single currency to fall back into its tight range around current levels until the ECB meets in a few weeks. However, the Bundesbank obviously has other ideas. Official headlines from the Central Bank suggest that the central bank will go along with a June easing is helping to rekindle new EUR selling interest outright and on the crosses (EUR/GBP, EUR/JPY) as the market heads stateside.
The theme of limited range trading is convincing the forex investor to look further afield for action, rather than the usual G7 pairs. A Global recovery is certainly helping to rejuvenate the markets interest in the Emerging Market currencies. The strengthening economic growth outlook in the advanced economies is supporting the improvement in global risk sentiment. The US economy is rebounding strongly after a sharp slowdown in Q1 while the Euro-zone seems to be gathering much needed momentum. Add this to investors worrying somewhat easing about emerging market growth has currencies like the BRL and ZAR amongst the best performing currencies so far in Q2. This upbeat tone persists despite the geopolitical concerns in Ukraine. The market has also broadly dismissed weaker than expected data out of China (IP +8.8% vs. +8.9%), pushing global bourses higher and allowing yields to back up. The FTSE is up towards levels not seen since Y2K while the DAX is back to near last January’s print. The health of the equities in weighing on Bunds, Treasury’s and Gilts, although the QE type bid remains strong support for fixed-income.
For stronger sterling direction many were waiting for tomorrows UK release of the BoE quarterly inflation report. Today’s GBP buying has been mostly on the back of direct EUR selling helping to push the cross lower (0.8147). Even potential M&A activity (Pfizer/AstraZeneca) will provide the pound further support. However, the market will have to figure out how much of a hawkish view on BoE’s Inflation report has already been priced into GBP. Daily momentum for EUR/GBP remains negative and similar to most of the market investors will prefer to sell EUR’s on limited rallied until proven wrong.
Bund/DAX – Increased Risk Has Investors Interested
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