I think it is fair to say that the currency markets are treading carefully at the moment, with implied volatility rates heavily subdued as we see congestion and consolidation across the G10. Through much of 2018, the US economy was head and shoulders above the rest of its major counterparts, and this was clearly reflected in the respective exchange rates. However, the pace of activity has clearly slowed, and optimistic calls for another 4 rate hikes from the Fed were soon dampened, not least of all due to the impact on stocks once long end yields reached key levels – notably 3.45-50% in the 30yr. 10yr topped out around 3.25%, but the Fed’s stance clearly unnerved investors who piled out of US stocks at the end of last year.
Since then, we have seen a recovery which has outperformed expectations for the most part. All 3 major indices are pushing on key technical levels, bolstered by hopes of a US-China trade deal which will ultimately do little to address the fears over the China slowdown and the impact of global growth as a result. Nevertheless, the carry trade follows sentiment in stocks, and with the BoJ maintaining its current policy of asset purchases, we can see little past ongoing JPY weakness at the present time. Naturally, the correlation with equities will play a major part in future direction, though we can only see a material turnaround in JPY if or when the Japanese central bank hints at potential tapering. There is a clear alignment in the way in which US stocks and USD/JPY continue to grind higher, albeit with limited progress, though this should be enough to suggest sideways price action in the latter.
Sterling has been the only currency offering improved volatility and movement seen around the Brexit votes last week saw the Cable rate testing under 1.3000 to the downside. This was ahead of the meaningful vote on Tuesday evening, and with news from the Attorney General that the improved concessions offered little change to the risk of being ‘trapped’ in a customs union, the market pre-empted a second defeat for Theresa May, which eventually came to pass. 1.3000 managed to hold after a failed attempt on Sunday night to test the 1.2900-50 support area, and as it becomes apparent that the vote to reject no deal was going to attract a majority, the spot rate pushed higher and eventually went on to test 1.3400. We failed just ahead of this, and we have effectively set a near term range, where either side will only be tested once we get a clear outlook on the Brexit process from here on out.
As it stands, statute keeps a no deal Brexit come 29 March on the table even if last week’s votes say otherwise. This should preserve the above range at the very least, if not, develop into a slow grind lower back into the mid 1.3100’s where we note a bank of support looking to position for a deal (of sorts) come the end of March or June. We suggest a longer delay in Brexit will likely further confuse the market, and lead to a wait-and-see period of consolidation.
EUR/GBP has provided a strong outlet for reflecting lower odds of a no deal outcome, but this has accompanied a period of EUR weakness which saw the EUR/USD rate falling to marginally new cycle lows in the aftermath of the announcements from the ECB earlier this month. Whether the latter has developed a meaningful base in the near term depends on the data series from Europe. Ultimately, Europe is heavily export-dependent, so it is hard to see a significant recovery based on the fundamental backdrop, as slower global growth will continue to reduce demand. EU elections later this year will infuse a further period of uncertainty, as will the Brexit outlook which – as we have seen – has also dictated some of the play in the EUR in recent months.
We saw 1.1175-1.1200 as a key area which managed to hold firm post ECB, so from here, a move and hold above 1.1450 is what could potentially signal the prospect of higher levels, though the driver, in this case, would be USD weakness more than renewed confidence in the EUR.
* US Senate failed to vote for an end to the government shutdown last night as president Trump refused to budge on his demand for border wall funding.
* Trump is preparing a draft for a national emergency order to get his wall funding through.
* US Kudlow says China must deal with intellectual property theft in trade talks.
* US-Japan trade talks delay as White House focuses on China.
* This morning, ECB’s Villeroy says that external factors and uncertainty have been largely behind the slowdown.
* ECB Coeure says the slowdown has surprised the governing council.
* German IFO survey out this morning – looking for marginal weakness in the business climate, though expecting another miss.
* Last night, a report in the UK’s Sun newspaper that the DUP would accept the Irish backstop if a time limit was attached gave GBP a boost.
* Focus on next week’s start of the debates on plan B – GBP has been enjoying strong gains this week, helped by data also (healthy jobs report).
* CBI Distributive Trades Survey for Jan due out this morning.
AUD & NZD
* Uncertainty over Chinese growth this year prompting bearish calls on AUD across the board – some as low as 0.6000!
* Little on the docket to drive trade – Asia quiet, focus on risk sentiment, Wall St futures steady.
* Oil prices trying to push higher again to give the CAD a modest lift today.
* Canadian budget balance out this afternoon.
* Reports that White House has cancelled meetings with China over IP issues has been denied by Larry Kudlow.
* US press reports that the government shutdown may delay the issuance of tax refunds.
* Senate will vote again on reopening the government – 2 bills, one for Republicans to provide funds for border wall, other to open without funding – both expected to fail.
* US house price index data for Nov due later today.
* UK Trade Min Fox will use the Davos meeting to discuss replicating EU deals.
* Rees Mogg maintains that the Irish backstop is the only obstacle standing in the way of ERG (Brexiteers) voting for PM May’s deal.
* BoE’s Broadbent speaking later on this morning.
* CBI Industrial Trends Orders for Jan out mid-morning.
* All eyes on tomorrow’s PMIs and the ECB meeting thereafter – EUR in limbo until then.
* French Jan business confidence index down from 103 to 102 as expected.
* EU’s Moscovici says economic clouds are down to external factors.
AUD & NZD
* NZ CPI came in a touch higher at 1.9% vs 1.8% but is net unchanged from prior reading.
* Westpac-Melbourne Institute leading index down -0.2% in Dec.
* Nov retail sales due out this afternoon.
* API weekly crude stocks data out this evening.
* Yesterday, we heard president Trump say that the Chinese growth data shows the need for a trade deal.
* The US is set to proceed with the extradition of Huawei executive according to the Canadian press.
* US existing home sales due later on today.
* Cabinet member Rudd tells the PM that a number of MPs are ready to quit if she pushes for a no deal Brexit.
* Growing calls from Tory MPs to allow for a delay in Article 50.
* EBS FX and Swaps operation moving to Amsterdam.
* UK employment report and public borrowing figures out this morning.
* German ZEW survey is this morning’s focus in the Eurozone.
* EU Commission has cut Italy’s growth forecast in 2019 to 0.6%.
* Key weight for EUR this week will be the ECB on Thursday as well as the Jan PMIs the same day.
AUD & NZD
* Chinese CEOs are targeting Australia as a major growth market according to the Australian press.
* Global growth downgrade by the IMF adding to negative risk tone this morning.
* NZ BusinessNZ services PMI falls to 53.0 in Dec from 53.5.
* Oil prices having less of an impact on the CAD as we see a broad-based pick up in USD demand.
* Lower Gold prices highlight early year demand for USDs away from all other major currencies.
* Canadian manufacturing and wholesale sales for Nov due out this afternoon.
Bearishness in EURUSD continues, in this weekly chart price bounced off the 1.1490-1510 area and has now moved toward the uptrend line marked on the chart.
If the trendline breaks we may move lower toward the 1.10 level.
The trendline level could be used as support.
The downtrend which started at the beginning of 2018 is still intact.
1.13 has looked sticky in the past and looked like a base formation but if it breaks the lower low, lower high sequence continues.
1.1186 is the 61.8 Fib retracement level.
EURUSD seems to be oversold and the repricing of the rate hiking cycle by the Fed did point to USD weakness. The Gov. shutdown does not seem to have affected the USD as much as expected but Europe has its own issues with Italian and French budgetary concerns as well as Macron policy discontent in France. Stock markets have moved back to being risk on and the US-China trade deal could unwind some of the USD strength. Having said that its still a pretty bearish looking chart, keep an eye on the trendline and the consolidation low of 1.1216 for clues.