After last week's painfully tight forex trading ranges, and an historic seven-year low in volatility, it seems that dealers and investors are beginning this week on the "front" foot. Both the euro and the pound are on the move. Potential M&A activity [AstraZeneca (NYSE:AZN)/Pfizer (NYSE:PFE)] seems to be helping GBP on the margins - pushing it to print a fresh 4-year high above £1.6843. Regarding the 18-member single currency the EUR, there is no obvious reason for this morning's strength. There has been reasonable retail demand and combined with market chatter that Russian Banks have entered the fray has managed to push the EUR above its two-week high (€1.3873). The central bank of Russia's recent comments that they would sell their dollar holdings has also the market "front" running the central bank's requirement of reserve diversification into the EUR.
It may not just be "reserve diversification" talk that's supporting the EUR. Some of the blame should also be passed off to the ECB's excess liquidity managing to hit a multi-year low and the EONIA (overnight interest rates) at their second-highest level this year. Higher rates combined with greater euro money-market liquidity would suggest that "markets are healing and segmentation abating." This would obviously dampen the prospect for any immediate ECB action, and keep the single currency somewhat supported across the board. It will be difficult for Draghi and his fellow cohorts at the ECB to have a lasting impact unless they provide more explicit signals to help clear market uncertainty over whether they will act in May or June. The market is leaning predominately towards June, but no one can rule out any liquidity enhancing measures being introduced next month.
The market has little fundamental data to chew on today, but there have been a few ECB speakers already on tap during the euro session. The ECB's Constancio is worried about disorderly increases in bond yields and stated that the central bank would act if it saw the need to do so. While Noyer, speaking in Frankfurt, commented that the EUR's rise is equivalent to "unwarranted monetary policy tightening." The market is interpreting his comments as "sufficient to support the prospect of a negative deposit rate." However, with the market already expecting negative deposit rates his comments have had little impact. The ECB is required to "walk the walk" rather than repeating their "desire to act."
A squeeze in money market rates and reserve diversification is the likely EUR driver as the market heads stateside. With so little actually going on this month, this rally has more to do with a "positional" squeeze rather than a fundamental one. The EUR bear got short of the currency on expectations that Draghi and company would be dovish and on the back of some stronger US data. However, the single currency has remained resilient to both, and coupled with the major event risks this week is pressurizing most of those weaker "short" positions. The tech traders believe that the €1.3910 threshold will provide strong resistance in the first time of asking, especially ahead of German state CPI's tomorrow and the eurozone's CPI and FOMC meeting on Wednesday. If the April figure fails to improve, the ECB would come under further pressure to take incremental monetary actions.
Regarding the pound, there was a modest cable dip to £1.6837 after the AstraZeneca statement stating that they were confident in their own strategy and rejected Pfizer talks. However, there is solid support at this morning session's low between £1.6777-1.6787, with laddered sterling bids all the way above the psychological £1.6800 handle. Now with a new multi-year high print (£1.6855) it certainly exposes £1.6900 in the shorter-term.
Both the FOMC and BoJ meet this week. The Fed meet finishes Wednesday and is almost certain to taper their asset-buying program by another $10B. The accompanying statement (no press conference scheduled) should indicate that the Fed intends to keep rates "lower for longer." The BoJ meeting finishes the same day, and so far market consensus does not expect any immediate action from Governor Kuroda and company. However, it should not be ruled out, but the general feeling is that the BoJ will stay on hold, believing it's too soon to gauge total effect of the introduction of the sales tax (April 1st). Governor Kuroda's press conference will be key - expect it to shape the timing for when the BoJ will next take action.