This is a big week for economic data and institutional news, but we mustn’t lose sight of the looming capital outflow out of Cyrpus. Capital flight is hardly a new response to government seizures and because the confiscation is large—as much as 60%--this time the efforts to escape could be ingenious and daring. Think “black market” and “fast boats.” It’s in the best interests of the EMU to downplay outflows, but make no mistake—this is the stuff of adventure movies.
The calendar this week is full of central bank meetings and on Friday, US nonfarm payrolls. The RBA meets Tuesday while BoE, ECB and BoJ all complete their meetings Thursday. Hope still flutters around that Kuroda’s first BoJ meeting will be a stunner, although various initiatives have been suggested.
The Friday patrols report has to exceed Feb’s 236,000, not least because Feb is a short month and March is a long one. Wall Street guru Lynne makes the excellent point that we could get a preview from Fed Vice-Chairwomen Yellen on Thursday morning. “If she or NY Fed’s William Dudley suddenly sound less enthusiastic about the Fed’s QE, that would cause a stiff and significant sell off that could spell the end of the Fed-induced rally. It’s a little soon for that to happen but, someday it will.” Ahead of Yellen, on Tuesday we get Lockhart, Evens and Lacker.
Today the US data includes the March PMI and Feb construction spending. Tomorrow it’s March vehicle sales and Feb factory orders, but Europe and the UK issue masses of data that may overwhelm—PMI’s, unemployment, the BRC shop index, mortgage lending, etc. Wednesday brings US March ISM services index and the ADP private sector forecast for payrolls, along with more Feds (Bullard and Williams). Ahead of time we get Chinese service sector PMI and Eurozone CPI.
Thursday, more Feds (Bernanke, Yellen and George), plus the usual jobless claims and all those central bank meeting outcomes. Friday it’s nonfarm payrolls plus the US trade deficit for Feb and consumer credit, with data from Europe to include Italy’s deficit, eurozone retail sales and German factory orders.
Whew. At a guess, the data will show the US continuing to recover, including a decent payrolls number north of 250,000, while the eurozone shows continuing contraction, even if it’s nothing too frightening. To the extent that relative growth contributes to FX rate determination, the week should be euro-negative. And to the extent that the Feds whisper behind their hands that QE needs to be wound down, the dollar should benefit, too. Remember that the dollar generally gains in a “seasonal” pattern on the Wednesday ahead of payrolls for reasons we fail to grasp, no matter what the forecast and no matter the variance between the forecast and the actual in the end.
The institutional news will be how Draghi justifies having signed on to the first, failed Cyprus plan and any other comments on the formation of the pan-EMU banking regulator. He may escape opprobrium if he can announce that it will be up and running ahead of schedule, including deposit insurance for smaller accounts. Confidence has been lost in European institutions and only Draghi can start to rebuild it. The other big central bank policy meeting is the BoJ, and there the Abe-Kuroda team has already started to build confidence, at least domestically.
But as we wrote last week, expectations for shock and awe got overbuilt during the long run-up to this first policy meeting, so built-up that Kuroda can’t possibly satisfy them. Besides, the yen’s appeal as a safe haven to domestic investors and traders is permanent, so to speak, as a home currency always is in times of stress. As Cyprus gets worse, the yen should rise. Funny, Draghi holds the key to the yen as much as Kuroda, so watch euro/yen. But the euro/dollar is the benchmark currency pair and there we can’t see a way for the euro to get back over 1.2950, a strong resistance line. What would be the catalyst?