Will EURO Hold 1.10?

Daily FX Market Roundup 02.18.16

For the past 5 trading days we’ve seen consistent weakness in the euro. Unlike some other major currencies that have seen big intraday moves, the recent decline in EUR/USD has been slow and steady. Today’s sell-off was sparked by the ECB minutes and while we are not surprised to see the euro continue to fall, the reaction was larger than we anticipated since everyone knew the minutes would be dovish. However it seems investors needed validation after ECB member Nowotny’s comment that the market’s expectations for March is unrealistic. The recent reversal in EUR/USD has taken the pair within arms reach of support at 1.1050. This is an important level because it capped gains in the euro for almost 2 months, is where the 200-day SMA sits and where the currency pair broke out from in early February. Whether or not EUR/USD breaks 1.10 hinges on whether 1.1050 is taken out first. We expect this level to breached in time but traders may have to wait until next week’s PMIs for that to happen.

There was very little consistency in the performance of the greenback as the dollar traded higher versus EUR and AUD but lower versus GBP and JPY. This morning’s better than expected jobless claims report and Philadelphia Fed survey reminded investors that there is still positive momentum in the U.S. economy. As Fed watcher Jon Hilsenrath of the Wall Street Journal said in an interview this morning, everyone is talking about negative rates but the Fed is still thinking about raising interest rates. While recent Fed rhetoric, market dynamics and data point to no rate hike in March, the next move for the Fed will still be tightening and not easing. The U.S. dollar remains a sell on rallies but we believe there will an opportunity to do so at higher levels. Consumer prices are scheduled for release tomorrow and the increase in PPI suggests that we could have a surprise increase in CPI but the risk is still to the downside with gas prices moving lower.

Meanwhile sterling was one of the better performers today. No economic reports were released but Bank of England member Cunliffe said there’s no reason for the central bank to change its stance on rates. There’s not much takeaway from these comments as the BoE’s current stance is steady rates and we see no reason for them to alter this view in the next 6 months. Instead the strength of sterling came from hopes that the U.K. could reach a deal with the EU. Prime Minister Cameron was in Brussels today discussing how they could avoid Brexit. While progress is being made as the EU hopes to be conciliatory, Cameron said they are looking for the right deal versus a rushed deal which suggests that we could be a long way from an actual agreement and even then U.K. citizens will need to “approve” the deal by voting to remain part of the European Union. U.K. retail sales are scheduled for release tomorrow and between the sharp increase in spending reported by the British Retail Consortium and the smaller decline in shop prices, the odds favor an upside surprise.

If you are trading currencies, equities or commodities, you are watching oil, which continues to see large intraday moves. WTI crude was up more than 3% today before turning lower on inventories. According to the EIA, oil inventories rose by the biggest amount in 86 years. This confirms that production is outpacing demand and explains why OPEC nations need to curb output. With that in mind, we continue to view $26.20 as a bottom in oil. For the Canadian dollar, the next focus will be on retail sales and consumer prices. The sharp increase in wholesale sales points to stronger consumer spending while the big decline in the price component of IVEY PMI points to lower inflation. Between the two, we believe that retail sales will have the larger impact on the loonie but of course it also depend on where the greater surprise lies.

Last night Bank of Japan Governor Kuroda said they could ease further “in 3 dimensions if necessary” which refers to quality, quantity and rates. With the Japanese Yen soaring after negative rates, central bank officials have no choice but to “talk the currency down” by threatening to increase stimulus. However traders should know that the bar is high for another round of easing.

The Australian dollar traded sharply lower today on the back of weaker employment numbers. Economists were looking for a steady unemployment rate and job growth but instead Australia reported a loss of 7,900 jobs and a higher unemployment rate of 6%. Although the participation rate increased, indicating that more people are joining the workforce, all of the jobs found were part time and all of the jobs lost were full time. As our colleague Boris Schlossberg reported, “Today’s data may be the first sign that the Australian labor markets are finally succumbing to the reality of the situation on the ground. The loss of income is sure to curtail overall demand as the year progresses and may finally force the RBA to resume its easing cycle. Although the Aussie has been battered by risk aversion flows over the past year, the currency actually held steady for the past 6 months in no small measure due to the fact the unit still sports the highest yield in the G-11. However, if the data continues to deteriorate the 2% AU rate is sure to go lower.”

The New Zealand dollar also came under selling pressure on the back of lower producer prices, job advertisements and consumer confidence. Between the recent deterioration in New Zealand data and the decline in dairy prices, we believe that NZD is due for a more significant decline.

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