By Dean Popplewell
With little new data to chew on the forex investor continues to wander in "no man's land" of tight contained range trading. Capital markets have been expecting a much more aggressive breakout, especially with the EUR after the ECB decided to throw their whole tool kit at potential deflation and suspect growth in their region. Nevertheless, with the option barrier well entrenched, the single currency's direction remains at their mercy until they come off. The general market direction of a weaker EUR has already been decided, but will the investor get the desired uptick to sell the desired position? During yesterday's euro session the leveraged speculator jumped the gun and has been proven correct since.
Global growth this year has been tenuous at best and the fractured first half of this year has led to some necessary revisions. Overnight the World Bank announced a cut to its 2014 worldwide and other GDP projections. Global growth outlook was lowered to +2.8% vs. last January's +3.2%, mostly due to a weaker BRIC (China lowered to +7.6% vs. +7.7%, US forecast cut to +2.1% vs. +2.8%, Japan to +1.3% vs. +1.4%, and the euro region affirmed at +1.1%). Interestingly, China was also the only one of the large economies where 2015 and 2016 GDP is seen lower (+7.5% and 7.6% respectively). US GDP is expected to rebound to +3% in the next two years, while the eurozone area's GDP is seen at +1.8% in 2015 and +1.9% in 2016. World Bank officials also indicated that high-income country recovery is underway, while the pickup in developing world is proceeding slowly. The Emerging Market contingent should expect to face headwinds given their lack of unwillingness to implement policy changes in many countries.
Despite growth cuts putting global bourses under pressure this morning, the UK has produced a pleasant surprise on its jobs front, resulting in further support for sterling. The UK employment data was generally upbeat with only average earnings disappointing. The unemployment rate for April fell to an expected +6.7% from +6.8%. This is the lowest level in five years. On the disappointing front, the average earnings fell to +0.7% (forecast +1.2%, previous +1.7%). This highlights the ongoing squeeze in household finances, a concern for Governor Carney who is well aware that the UK's recovery remains too dependent on consumer demand. EUR/GBP (0.8061) was aggressively sold after the headline print, allowing the pound to push higher (£1.6781). The weight of cross selling is pushing the EUR lower (€1.3535) and further away from the desired uptick levels that "real" money would like to add to their establishing short EUR/USD positions. Currently, the single currency's rebounds remain very weak and with large barriers reported at €1.3525 and €1.3500 should only manage to temporarily brake the EUR bears' intentions.
Following interest rates and spreads is giving investors a heads up to most currency positioning. This has been the nature of capital markets ever since G10 Central Banks pursued a policy of low interest rates. A low volatile trading environment strongly supports the "carry" trade. Euro peripheral spreads are improving again after yesterday's correction, suggesting an appetite for European paper. The general movement of the currency will indicate whether it's domestic or foreign demand. Ever since last week's ECB ease, there has been uplift in demand for yield and in particular periphery bonds – Spain, Italy and Ireland have or will be trading through US 10s because of this demand.
The correlation between higher US yields and a higher USD/JPY (¥102.06) seems to be temporarily broken. This currency pair generally is a good proxy for investor risk appetite. Currently, higher yields translate into higher asset market volatility, which is driving JPY repatriation. With euro front-end rates lower than Japan's, investors will probably use EUR's rather than JPY as a funding currency – this will keep JPY in demand and USD/JPY on the back foot possibly seeking to test the 200DMA at ¥101.50.
Later this evening the RBNZ is widely expected to hike rates by +25bps to +3.25%. The market will look to Governor Wheeler to spring any surprises via forward guidance. Like most central bankers, the governor has been reluctant to see further strength in NZD ($0.8555). In the past he has even mentioned, "excess strength may require guiding the anticipated rate lower than current projections". Weaker dairy prices combined with a drop off in housing sales will give the green light to the RBNZ to be a tad more dovish. A "no" rate hike and the kiwi dollar should come under immediate renewed pressure.