Quiet economic calendar for the week ahead. GBP and JPY rallying simultaneously: what gives?

MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q1 Producer Prices Inputs/Outputs fell -2.5%/-1.4% QoQ vs. 0.0%/0.5% expected
  • Tokyo Apr. Consumer Confidence rose to 33.2 vs. 31.0 expected and 29.6 in Mar.
  • Japan Apr. Nationwide Department Stores Sales fell -11.3% YoY vs. -13.1% in Mar.
  • EuroZone Mar. Trade Balance out at +0.4B vs. -0.3B expected

THEMES TO WATCH

  • US May NAHB Housing Market Index (1700)
  • Australia RBA May Meeting Minutes (0130)

Market Comment:

The greenback roared to life to close the week last week as equity longs continued to head for the exits. The USD index closed back near its 200-day moving average, a level it crossed below on the previous Friday. Much more pronounced was the strength in the JPY last week, as EURJPY fell -4.3% and the higher beta AUDJPY dropped 6% on the week. For last week's FX This Week, we strongly supported the idea that we were way overdue for a pivot in markets back to risk aversion (we've been waiting for some time for this, we admit) and the winds of risk aversion did finally begin to sweep through markets during the week. Now that we have seen a convincing move back to risk aversion, the question for this week is whether the move follows through and develops and carries the USD higher. There are few dramatic economic data risks this week, especially in the US, which has hardly anything of note, but sometimes the market can make up its mind without discrete triggers - often a more valid signal than when the market simply reacts to the news.

GBP is squarely in the spotlight this week with EURGBP nearing a very key support level as seen in the chart below. What makes this GBP rally most impressive is that we can't really trace it to any release of data or specific story - the buying pressure simply looks like some big hands have decided to plow into GBP. A Bloomberg article out this morning indicates that some large players, particularly in real estate, feel GBP assets are undervalued due to the drop in prices combined with the very weak currency. We have long felt that GBP was far too weak versus the EUR, mostly for Euro-negative rather than GBP-positive reasons. After all, The UK has been forced to take an enormous hit and respond quickly to the global deleveraging and its currency has weakened massively in sympathy with the shocks to the system, particularly those shaking the UK financial sector. But now, the idea here may be that the financial sector has largely bottomed out even if growth hasn't and that sterling is simply too cheap versus the Euro. After all, Euro strength over the past one to two years has significantly impacted European economic growth. As well, European banks have so far failed to fully take into account the balance sheet hits that are necessary to come to terms with the asset quality in Eastern Europe and even in their own domestic markets.

Another factor underlining the validity of sterling's strength is that it has come in the face of JPY strength. In days past, the two currencies usually moved in opposite directions, but sterling finally seems to be doing its own thing. This suggests a re-positioning in the GBP market - perhaps vs. EUR.

Chart: EURGBP

The 0.8800 area is a key structural zone for this pair, with a solid break possibly leading to 0.8500. To the upside, the pair needs to regain the 0.9000 handle if any rally scenario is to become plausible.

chart 1

Economic data highlights this week:

Tuesday:

  • Norway Q1 GDP - Norway's growth is expected to dip into negative territory for the Q1. It is more than surprising to remind ourselves that . We expected NOK to be a safe haven currency on risk aversion, but the Norges Bank seems very wary of this development, so the market can't seem to make up its mind. The 8.50 level is crucial in EURNOK.
  • UK Apr. CPI/RPI - UK retail prices have dropped into increasingly negative territory for year on year comparisons due to a fall in energy prices even as the core CPI is still well above 1.0%.
  • Germany May ZEW Survey - this survey is reaching its highest levels since mid-2007, which could be a contrarian signal that expectations are far too positive at the moment. This survey measures expectations for growth by institutional investors and analysts and the positive readings may be driven by a "surely things won't get worse" mentality
  • US Apr. Housing Starts and Building Permits - the NAHB housing survey has ticked up in recent months, so we might expect housing starts to begin showing signs of putting in a bottom soon at these spectacularly low levels - far, far worse per capita than is apparent from looking at historical previous lows in this indicator
  • US Weekly ABC Consumer Confidence - consumer confidence has responded far less to the financial market rally than some of the institutional surveys, likely because the real state of the economy in terms of credit, income and job security have not improved for the average person.

Wednesday

  • Japan Q1 GDP - expected at a -16% annualized rate - need we say more? Japan will need to rethink its export-driven model, but will it come up with any answers?
  • Australia May Westpac Consumer Confidence - is Australia living in a bubble or is it part of the world economy? We suspect the latter and that AUD's valuation is getting a bit stretched....
  • Germany Apr. Producer Prices - the year-on-year contraction in price levels continues. The ECB is placing a significant bet that deflation pressures will ease as we are seeing one-off effects from energy price declines
  • UK Bank of England Minutes - will offer further insight into the BoE's decision to go ahead with further - if not "all out" - quantitative easing.
  • Canada Apr. CPI - Canada's Core CPI remains approximately the same as it's US counterpart: slightly below 2.0% year-on-year while headline numbers are expected to match 15-year lows around 0.5%
  • US Weekly Crude Oil and Product Inventories - oil is looking expensive at 60 dollars a barrel relative to US inventories - but the oil market is important to watch due to its effect on the greenback.
  • US FOMC Meeting Minutes - for the April 29 meeting - may not contain much of interest as this was mostly a "wait and see" meeting.

Thursday

  • New Zealand Apr. Non-resident Bond Holdings -
  • Germany/EuroZone May preliminary estimates of PMI Manufacturing and Services -
  • UK Apr. Retail Sales - the consumer has supposedly remained very resilient in the UK as Retail Sales have not yet fallen on a year-on year basis - is that really possible or true? The April numbers will be calculated using a new methodology - too detailed to go into here, but likely because the old methodology was, well, methodologically challengged - but we suspect that if it is any good, the new methodology will mean that we could see a significant downside surprise with this number.
  • US Weekly Initial Jobless Claims - this number is receiving more and more attention as everyone recognizes that it is the first number that must begin to fall consistently if we are to see an easing of the relentless pressure on the economy from rising joblessness. Two or three weeks below 600k would be a start, but we haven't had a single reading below 600k since mid-January, though the indicator does appear to be leveling off, so we might ought to begin to get our hopes up. * US May Philadelphia Fed - the second of the three major manufacturing surveys. It is quite possible that we see a strong uptick in these surveys for a couple of months as inventories are depleted, even if final demand is still apparently very lack-luster.

Friday

  • Japan BoJ to announce rates - no interest rate change is likely, but perhaps we get a stronger policy response to the most rapidly imploding major economy in the world? One reason Japan may be willing to just sit there and "take it" to a degree the US, for example, would never imagine possible, is that they have tried every form of stimulus and QE in the past, without dramatically positive results.
  • UK Q1 GDP - If it rolls in as expected around -4%, the UK's economic contraction for the quarter will be far less worse than evident elsewhere and could help explain some of sterling's resilience
  • Canada Mar. Retail Sales - Canada's retail numbers have only fallen about -5% for year-on-year comparisons and a mere -1.5% ex autos, far better than the -8%/-11% in the US - where consumer credit markets were far more radically impacted. Still, could there be more relatively downside surprise potential in Canada in the near term?