In FX The War of Words Has Begun

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Market Drivers Mar. 17, 2016

German PPI cooler than expected
Dollar buying kicks in
Nikkei -1.25% Dax 0.04%
Oil $40/bbl
Gold $1255/oz

Europe and Asia:
EUR GE PPI -0.5% vs. -0.3%

North America:
CAD CPI 8:30
CAD Retail Sales 8:30
USD U of M 10:00

The dollar saw a mild bounceback in a quiet Asian and early European session as the volatile week of trade was coming to an end. With no eco and macro data on the calendar currencies mainly consolidated around their levels since the New York close with the greenback finally getting some respite from selling.

ECB chief economist Praet gave an interview to the Italian newspaper La Republica and his comments rattled the euro a bit as he noted that the central bank could take the deposit rate further into negative territory. Asked if the ECB has reached the lower limit of its interest rate policy Mr. Praet stated, “No. As shown by the other central banks, we have not reached the lower limit. If new negative shocks worsen the economic scenario, a rate cut remains among our weapons.”

G-3 monetary authorities are clearly involved in a war of words as they try to keep the exchange rate of their respective currencies contained. Mr. Praet’s comments were a clear volley to the market to keep the euro from its one way climb higher. After the failure of the ECB press conference to move the unit lower and the follow through post dovish FOMC meeting this week, the European monetary officials find themselves at an exchange rate that is nearly 500 pips higher in a matter of two weeks. No doubt there is now concern in Frankfurt that the recent climb in the euro will only exacerbate the deflationary pressures in the region. Today’s weaker than expected German PPI data which came in at -0.5% versus -0.3% eyed only serves to underscore that point.

Therefore we expect much more dovish rhetoric from ECB in the coming weeks, especially if the EUR/USD tries to move towards the 1.1500 level. With Fed clearly unwilling to strengthen the dollar at this time, it’s every man for himself in the forex market and we believe that the war of words will escalate if exchange rates continue to climb.

In North America the calendar will be driven by Canadian data with Retail Sales and CPI readings on tap. The loonie has continued to march higher with USD/CAD falling below the psychologically important 1.3000 mark, but the pair has now reached long term support and may have a much harder time making further progress unless oil continues to climb well above the $40/bbl level.

Boris Schlossberg
Managing Director

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