Euro Choked By Options, Awaits A Catalyst

 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, UDN, UUP
by: Dean Popplewell

In FX, the antipodeans stole the show again overnight. Their respected currency enthusiasm has not been able to spill over into the euro session ahead of the Bank of England rate announcement. On all accounts the option corralled 17-member single currency requires a significant catalyst to break ranks – all week long the market's lack of conviction has kept many investors on the sidelines seeking belief in their reform fatigued currency.

"Down-under" currencies could not just do that – stay down. Both the Kiwi and AUD were able to recoup most of the previous day’s losses, and then some, in response to stronger than expected Q1 employment growth and a drop in the unemployment rate. New Zealand’s unemployment rate fell to a new 3-year low of +6.2% in Q1 from a revised +6.8% in Q4. The number of people in work climbed by +38k, or +1.7%, q/q, while the participation rate improved to +67.8% from +67.2% in Q4. The market should expect the RBNZ to take this week's surprising data with caution – historically, the Kiwi household labor force survey has generally lagged other employment surveys in the country and on the whole the labor market, similar to other economies, has yet to recoup all losses and revisit levels seen 18-months ago.

Across the Tasman Sea, and not going to be outdone by the staunchest of rivals, Australia too managed a stronger than expected employment print last month. Aussie unemployment rate unexpectedly fell to +5.5% in April from +5.6%. The number of people employed rose by +50.1k (+34.5k full-time) compared with a market expectation of a +11k increase. The participation rate also rose to +65.3% from +65.2% in March. After these stellar results the futures market is now pricing in only a +19% chance of a rate cut in June, down from +39% before the employment release. In total, there is -33bps worth of cuts priced in for the next year, down from -60bps before the employment headlines. This easing expectation has both model and macro funds considerably short AUD. Expect China again to aid these positions – higher than Chinese CPI reported overnight is expected to slow the AUD move higher and this despite the currency recouping losses posted after the surprise rate announcement earlier this week by the RBA (+2,75%). Did the RBA jump the gun with its rate cut?

China’s consumer price index accelerated in April, up +2.4%, y/y, compared to the median forecast of +2.3% and a rise of +2.1% in March. The headline was driven mostly by food prices, which remain a bit of a concern due to slightly tighter supplies, but policy makers are said to be addressing the upward pressure. The drop in the producer price index (falling to +2.6%, y/y, in April) is more worrisome, as it shows that demand is still weak. There remains a strong need for government to boost investment and consumption.

Jumping on the rate cut bandwagon and keeping up with the "Joneses" (Australia) last night was South Korea. It seems that some emerging economies do not want to be left behind the curve now that Abenomics is in motion. Are they playing their “currency war” card? Even the Bank of Thailand (BoT) governor is turning dovish and is shifting policy rhetoric toward cuts. South Korea’s central bank (BoK) delivered its first interest rate (-25bps) cut since October as it lowered the benchmark seven-day repo rate to a two-year low of +2.5% for this month. In his post communiqué, the BoK governor indicated that weak JPY and slow global recovery posed risks to Korea's economy, and that the BoK is closely monitoring the FX market. This is the new norm for emerging economies now that Japan has gotten free reins to weaken their own currency. While unacknowledged, the RBA’s surprise overnight cash rate cut to a record low of +2.75% may have also factored in the BoK decision.

The Bank of England will not have the same concerns as its emerging friends. The market has been relatively stable ahead of the BoE monetary policy committee meeting this morning where many expect the “Old Lady” to keep rates on hold at +0.5% and QE unchanged at +£375b. The better tone to U.K. data of late suggests that it's unlikely that there will be any changes to policy before ex-BoC Governor Carney takes the helm in July. Inflation remains above target, and with global equity markets hitting new highs there seems little point to be printing more cheap “cash.” Due to the personnel change up and stable data the market should begin focusing on the August monetary policy meet as the next key date for change, if any.

Proof is in the pudding on the U.K. data front. This morning’s U.K. Industrial Production for March came in stronger than expected with a gain of +0.7%, m/m, vs. +0.2%. Analysts do not expect the headline print to lead to any revisions to the Q1 GDP data, but the data supports the view that QE bets should be expected to be on hold until the new leader is in place.

The Spanish bond auction has had a sting in the tail for the single currency, pushing it down to new overnight lows heading into the North American session where U.S. jobless claims takes top billing. Despite the Spanish issue going well, the "street" owned the supply, and with the weak longs bailing, pressured the EUR outright, sinking the currency 20-30 ticks in sympathy after been capped by Asian Central Bank Flows and option strike protection interest. Again the tight EUR outright range suggests that large options expiries will continue to influence the EUR. When the rumored options roll off later this morning, investors should expect a delayed reaction to the U.S. fundamental data release.

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