The Big Picture
The USD rose against most currencies even as US stocks continued to rally (DJIA at a record high, S&P 500 up six out of the last seven days). A firm ADP employment report helped to raise expectations for Friday’s payrolls data and gave a good tone to the market despite a fall in factory orders, which in any event was better than expectations.
The “risk on = sell USD” relationship seems to have ended, which means that some other currency – probably the yen and perhaps GBP -- will be used as a funding currency. While GBP short rates are about 20 bps higher than US rates right now, there is virtually no chance of a UK rate hike in the foreseeable future, indeed quite the contrary, and besides, the small rate differential is nothing compared to the potential depreciation in the currency. The return of the “yen carry trade” and perhaps the addition of the “sterling carry trade” should allow USD to rally further.
The Bank of Canada kept interest rates unchanged and BoC Gov. Carney softened his hawkish outlook somewhat, which sent USD/CAD higher. BoC is the only G7 central bank that is warning about a rate hike.
Today will be a big day in Europe: the Bank of England (BoE) and the European Central Bank (ECB) both hold policy board meetings. Neither is expected to change rates, so the focus will be on ECB President Draghi’s comments after the meeting. We think he’s likely to take a dovish stance in order to keep the euro from strengthening. In that respect, the market will be particularly watching to see any change in his views on inflation. In the US, the Fed will release the first of two reviews of bank capital adequacy under stress test scenarios, which could affect the outlook for lending. The weekly initial jobless claims will also be a feature.
European stock markets were higher, peripheral bond spreads narrowed further, and Spain is confident enough of investor demand that it is considering issuing another 10-year bond. Even Greek economic sentiment improved. Yet EUR/USD couldn’t make any progress: bearish news for EUR/USD.
The pair confirmed the strong resistance highlighted at 1.308, failing to even spike above this level. The fear of false signals by the Stochastics and RSI-MA crossover was also validated during a larger than anticipated down move, with the pair closing near its lows, finding support at the noted 1.296 level. We now see resistance in the 1.3055-1.308 area but are in favour of bearish positions. Dovish comments by Draghi today may see the rate move to the 1.288-1.29 area.
USD/JPY moved higher after two members of the Monetary Policy Board proposed various easing measures to start immediately, rather than waiting until the new management is in place at the next meeting. The proposals were defeated by majority vote, but they show that the new Governor already has two allies on the Board. Kuroda + Iwata + these two members = four out of the nine-member board. Kuroda only needs to convince one other member and they’re off! USD/JPY bullish.
The proposals caused a larger than average increase on the rate, with a mini retracement to 92.5 not materializing. With prices seeming to find resistance in the 94.2-94.5 area, we would like to see a breakout from this level before proceeding with bullish positions, noting a target thereafter of 97.6 and a subsequent one at 100.
The pound weakened ahead of today’s BoE Policy Board meeting. There’s some risk that they will raise their target for QE bond purchases; 11 out of 39 economists surveyed by Bloomberg thought that they would as a majority on the Board now think that the economy needs some new stimulus. Maybe a weaker pound? We remain bearish GBP/USD.
Cable looks like it is in uncharted territory, hence the need for a zoomed-out chart. With our intraday target of 1.5108 being met on March 5th, and with the subsequent one at 1.504 met yesterday, it is worth revisiting the pair. The rather sideways action we have had the past couple of weeks, with resistance at the 61.8% retracement level of the the May 2010 – April 2011 uptrend point to a continuation pattern. We thus see further Sterling weakening, placing an intraday target of 1.4920, with a subsequent one at 1.4860 as we look to the fulfillment of our longer term target of 1.4700.
Gold was up slightly, but I notice a big increase in the number of press articles that I read asking “is the rally over?” With USD rising, Eurozone risks fading and no new QE measures likely from the US for now, retail investors are moving out of gold and into stocks, which are getting most of the attention.
Gold essentially hit our $1586 target again, finding noted resistance at this price. Given the increased uncertainty we often experience before major announcements and news, we may see further temporary gains for the precious asset over the next couple of days. A break of the resistance level may call for bullish positions with a target of $1602.
- Oil lower yet again as inventories in the US rose almost five times more than the market expected despite a fall in imports.
WTI yet again found resistance at $91, with the early gains following the death of Venezuelan President Hugo Chavez being indeed short-lived with the bearish trend enduring. Although we see further weakening for the commodity in general, sentiment in the daily, H4, and H1 charts signal a possible retesting of the $91 level today.