USD gains in choppy trading, more EURUSD downside

Forex News and Events

Global markets continue to trade in choppy, disconnect fashion. Equity markets were mixed. Japans main stock index fell 1% following weak European and US sessions and slow core CPI data, However, China, Australian and New Zealand were higher. In the FX markets, USD dominated the G10 making solid gains verse the NOK and NZD. Markets await a European deal with Greece as public coffers dry up and a big payment is due. Most traders anticipated another European crisis patch solution, yet the closer to the edge we get the more nervous markets become. The latest news is that Greece will present key measure to increase tax revenues and to support new investment as a part of the new reform agreement, Brussels is waiting on before releasing additional fund. EURUSD bullishness faded after piecing 1.1043 resistance, falling swiftly to 1.0821. Downside break of 1.0890 removes short term recovery risk and puts the focus back on 1.0463 support. Elsewhere, in the Eurozone, ECB President Draghi stated that the central banks bond buying program will reach its target of €60bn for the first month of operation. According to Draghi “Interest-rate reductions are being transmitted to the whole financial intermediation channel and credit contraction is receding.”

USDJPY reverse off 118.33 lows, but trading below 120.20 suggests continued bearish pressure. Japan’s annual core CPI rise came to an abrupt halt after rising for nearly two years dripping to 2.2% from 2.4%. In our view this should be the start of disinflation in Japan and will further pressure the BoJ to expand monetary stimulus in Q4 2015. In other Japanese data jobless rate dropped to 3.5% in February while retail trade fell -1.8%y/y verse -1.5% expected. Brent crude dropped $1 from $59.78 as concerns over supply disruption from Yemen eased as Saudi-led air strikes were paused. With a light economic calendar traders will be focused on Fed Chairs Yellen’s speech on monetary policy later today. Expectations for Fed rates hikes have been pushed off due to confusion & tactful FOMC statements, supporting a broad USD sell-off. However, we suspect that wordplay is directed to lessen one-way pressure on the USD, more than a signal a shift in policy path. We still see an July rate hike. Therefore, remain bearish on EURUSD and see current rallies as opportunities to reload on shorts.

China and the SDR

In a sharp reversal, the yuan has erased nearly all of the 2015 loses verse the greenback. Part of this change in direction was due to shift in expectations for the Fed's first rate hike (broader natural USD sell-off). However, this move has also been driven by significant PBoC FX intervention, suggesting a larger policy committed. At the same time, People’s Bank of China Governor Zhou Xiaochuan has been vocal, indicating that the Chinese government’s aim is to internationalize the yuan. There is a real push to rebrand yuan in the image of a stable, non-EM correlated asset which could be freely traded. Potentially, not coincidentally, the IMF is reviewing Special Drawing Rights (SDR) and China hopes that the yuan can be included into the fund reserve currency basket. The composition of the SDR basket (USD, EUR, JPY and GBP) is reviewed every five years and reports indicate that yuan narrowly missed the cut in 2010. The IMF criteria for inclusion outlines freely usable currencies which are “widely used to make payments for international transactions and is widely traded in the principal exchange markets.” In the last five years, growth in yuan trading volume and usage in international trades has skyrocketed. However, the deliberation around “freely usable” is the barrier. The primary requirement that the yuan is “freely” convertible, has not been meet. Despite strong efforts to internationalize the yuan, it is far from “freely” convertible. While China has reached other milestones such as percentage of global trade and yuan trading volume, the simple fact that investors can’t make a sizable bet in China will stop inclusion. However, this is very much a political decision. Since there are no hard rules for SDR inclusion, there is a critical discretionary aspect with demands a majority vote on the IMF council for any change. This discretionary aspect injects a high level of uncertainty into the outcome. We understand the reason to say “no” but there are compelling reasons for the G20 led by the USA to say “yes”. China is clearly on the rise and increasingly demanding a role on the global stage. This might be viewed by the US as a way to get China to fast track financial liberalization, while at the same time integrates China into a leadership role with heavy reliance on G20 partners. Inclusion in the SDR and greater role in the IMF might lessen the commitment to China’s Asian infrastructure Investment Banks (which is a concern to the US).