The Big Picture

Fed view on the dollar not affecting their view on rates We’ve heard a lot of Fed officials commenting on the dollar and its impact on their outlook. From my point of view, the market seems to be misinterpreting their statements in order to justify profit-taking. Take Cleveland Fed President Loretta Mester’s comments yesterday, for example. Her views on the dollar were similar to those that Chicago Fed President Evans and Atlanta Fed President Lockhart expressed on Friday. She said that the level of the dollar is one of the conditions Fed officials look at and that a strong dollar will affect US exports. The market focused on these comments and ignored her other comments: that it is appropriate for the Fed to raise rates this year and that a June rate hike is possible. San Francisco Fed President Williams, a voting FOMC member, said that “by mid-year it will be the time to have a discussion about starting to raise rates,” and that the dollar’s strength isn’t an impediment.

If you don’t believe him, Fed Vice Chair Stanley Fischer said that a rate hike “likely will be warranted before the end of the year,” with the exact date depending on the data (as they’ve made very clear already). Fisher did not comment explicitly on the dollar, but did say that he thought other countries weren’t manipulating exchange rates – in other words, he’s OK with a rise in the dollar caused by other countries’ loose monetary policies. The impression I get from all these comments is that yes, the dollar may restrain exports. But that was already factored into their forecast for slightly slower growth and will not put them off raising rates. Almost all the comments I’ve heard from Fed officials still imply that they’re considering a rate hike by mid-year. I believe the market is over-emphasizing the likely impact of the stronger dollar and drawing the wrong conclusion with regards to policy. I expect a reversal of this approach at some point and the resumption of the dollar rally.

Merkel offers tea & sympathy but no money Greek PM Tsipras met with German Chancellor Merkel and had what appeared to be pleasant talks, but there was no change in Greece’s financial position as a result. Merkel insisted that Greece had to talk to the Troika, not her. “Reforms have to be discussed with the institutions, not with Germany,” she emphasized. A Greek government official said that the country may submit a list of reforms by the end of this week. The German newspaper Frankfurter Allgemeine Zeitung reported that the Greek government has until April 8th before it runs out of money. That’s consistent with what some Greek officials have been saying. Meanwhile, the Greek economy is collapsing; industrial production (the turnover index in industry) plunged 16.0% yoy by value in January, a sharp acceleration from –7.7% yoy in December. Greece remains a major risk for the euro.

Today’s highlights: Today is PMI day. The graph shows the general trend of the global PMIs, with the level of the PMI on the X axis and the change over the last three months on the Y axis. The best place to be is in the upper right-hand corner, which shows an accelerating expansion (PMI over 50 and rising). The second quadrant, the upper left-hand corner, shows the PMI is below 50, meaning activity is contracting, but the PMI is still higher than three months ago, so at least things are improving. The lower right-hand corner is also mixed; there, the PMI is above 50, but the pace of expansion is slowing. And the place you really don’t want to be is the third quadrant, the lower left-hand corner, where your PMI is below the 50 line and also it’s contracting – that’s where you have an accelerating contraction.

China and Japan were first, as usual. China’s HSBC/Markit PMI was down sharply and is now back in contractionary territory. Both the Chinese PMIs are in the dreaded third quadrant (accelerating contraction). This confirms the slowdown in Chinese growth that began to appear in the data during January and February. AUD is the currency most vulnerable to slowing Chinese growth and I would expected AUDNZD to resume its slow grind towards parity. The Japanese manufacturing PMI, which attracts little attention, is now just barely in expansionary territory.

The preliminary manufacturing and service-sector PMI data for March from several European countries and the Eurozone as a whole are coming out today. It’s noticeable that the Eurozone is in the favorable upper right-hand quadrant. It’s likely that we could see further improvement in the Eurozone PMIs this time too. However, that doesn’t seem to do much for the currency, which is dominated more by QE than by signs of economic recovery. The US Markit manufacturing PMI is expected to slow, but remain well in expansionary territory.

Note how well Sweden is doing. It’s far in the upper right-hand corner. That’s one reason I was surprised that they cut interest rates. Probably they’re more concerned about being in deflation than about economic activity. However, their main export market is the Eurozone, which takes 60% of their exports. As the ECB’s QE program kicks in and consumer confidence comes back in the Eurozone, as we saw yesterday, their exports ought to do well. I’m bullish on the SEK, at least relative to the euro or NOK.

On the other hand, Australia and Canada are in the lower left-hand quadrant, the worst place to be. These economies are suffering from the fall in commodity prices, particularly iron ore and oil. I expect their currencies to weaken as the terms of trade turn against them, their economies suffer, and their central banks have to cut rates to keep things going.

From the UK, we get the CPI for February. It’s expected to fall to +0.1% yoy, just above deflation. The Bank of England’s February inflation report warned that the CPI may drop below zero. On top of that, the minutes of the latest BoE meeting showed that the members seemed more concerned than previously about inflation as it may remain below the target for longer. UK inflation is far below the BoE’s target and to make matters worse, inflation expectations are coming down too. A further decline in inflation could be negative for the pound.

In the US, the headline CPI rate for February is expected to remain in deflation on a yoy basis, but the core CPI rate is expected to accelerate slightly. This suggest that the low energy prices are the main reason behind the deflationary pressure. The Fed has said that this is just a transitory effect, and so it’s willing to look past it. We’ll have to see how long that view lasts, particularly if oil continues to decline.

The Market

EUR/USD continues higher

EUR/USD continued to race higher on Monday and hit resistance at 1.0970 (R1). The rate is still trading above the prior short-term downtrend line taken from the peak of the 26th of February and above the uptrend line drawn from the low of the 13th of March, therefore I would consider the short-term bias to remain positive. Although we may experience a minor retreat, I would expect the next leg up to challenge the resistance hurdle of 1.1045 (R2). As for the broader trend, the price structure still suggests a longer-term downtrend. EUR/USD is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. Therefore, I would treat the near-term uptrend or any possible extensions of it as corrective move of the larger down path.

• Support: 1.0885 (S1), 1.0765 (S2), 1.0700 (S3).

• Resistance: 1.0970 (R1), 1.1045 (R2), 1.1160 (R3).

GBP/USD waits for the UK CPI

GBP/USD rebounded yesterday after finding support at 1.4835 (S1) and hit resistance at 1.4975 (R1). Today we get the UK CPI for February, which is expected to have slowed. This could encourage the bears to pull the trigger for another test at the 1.4835 (S1) hurdle. A break below that line is likely to extend the bearish wave, perhaps towards our next support obstacle of 1.4775 (S2). Zooming on the 1-hour chart, I see that our hourly oscillators amplify the case for a leg down. The 14-hour RSI fell near its 50 line and could fall below it, while the MACD, although positive, stands below its trigger and points down. As for the bigger picture, the price structure on the daily chart still suggests a larger downtrend. Therefore, I would consider the recovery from 1.4630 as a corrective move of the longer-term down path.

• Support: 1.4835 (S1), 1.4775 (S2), 1.4725 (S3).

• Resistance: 1.4975 (R1), 1.5035 (R2), 1.5140 (R3).

EUR/JPY trades in a short-term uptrend

EUR/JPY continued to gain pips on Monday, but the positive wave was stopped between the support of 130.30 (S1) and the resistance of 131.85 (R1). The pair started printing higher peaks and higher troughs above the uptrend line taken from the low of the 13th of March, thus I see a positive near-term picture. A break above 131.85 (R1) would confirm a forthcoming higher high on the 4-hour chart and could see scope for extensions towards our next resistance of 133.50 (R2). On the daily chart, I still see a longer-term downtrend. I would treat the recovery from 126.90 as a retracement of that larger down path. Nevertheless, there is positive divergence between our daily oscillators and the price action. This gives me a reason to take to the side lines as far as the overall trend is concerned. I would like to wait for signs that the downtrend is gaining back momentum.

• Support: 130.30 (S1), 129.00 (S2), 128.00 (S3).

• Resistance: 131.85 (R1), 133.50 (R2), 134.60 (R3).

Gold hits the 1190 zone

Gold traded somewhat higher on Tuesday but the advance was stopped by our resistance line of 1190 (R1). The move above the trend line on Friday shifted the short-term bias cautiously to the upside in my view, thus I would expect a move above 1190 (R1) to aim for the psychological round figure of 1200 (R2). Our daily momentum studies support the notion. The 14-day RSI reached its 50 line and could move above it in the near future, while the MACD, although negative, stayed above its trigger and continued north. As for the bigger picture, since the peak at 1307, the price structure has been lower highs and lower lows, and even if we see the precious metal trading higher in the near future, the possibility for a lower high still exists. For that reason I would consider the recovery from around 1140 as a corrective move, at least for now.

• Support: 1175 (S1), 1165 (S2), 1147 (S3).

• Resistance: 1190 (R1), 1200 (R2), 1210 (R3).

WTI hits resistance at 47.50 and pulls back

WTI rallied on Monday, but the up leg was stopped by the 47.50 (R1) key resistance. Subsequently, the price retreated somewhat. Given that the price slid from near the upper line of a possible triangle pattern, and that there is negative divergence between the 14-hour RSI and the price action, I would expect the current decline to continue. A move below 46.50 (S1) is likely to target the lower line of the triangle or the next support at 45.70 (S2). On the daily chart, WTI is printing lower peaks and lower troughs below both the 50- and the 200-day moving averages. This keeps the overall picture of WTI negative. However, there is positive divergence between the daily oscillators and the price action. Therefore, I would prefer to stay neutral on the larger trend and wait for price and momentum alignment.

• Support: 46.50 (S1), 45.70 (S2), 44.80 (S3).

• Resistance: 47.50 (R1) 48.85 (R2), 49.45 (R3).

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY