FOREX WEEKLY REPORT. 4 March - 10 March Dieter Merz, Chief Investment Officer. Luciano Jannelli, Ph.D. Chief Economist

Transcription

1 Dieter Merz, Chief Investment Officer FOREX WEEKLY REPORT Luciano Jannelli, Ph.D. Chief Economist Luc Luyet, CIIA, CMT Senior Analyst DISCLAIMER & DISCLOSURES

2 FOREX WEEKLY REPORT - An overview p.3 Economics US economy soldiers on in spite of sequester p.4 FX Markets Italy's election upsets markets p.5 FX Markets Other important central bank meetings in the week ahead p.6 FX Markets Canadian dollar paving the way for the Australian dollar? p.7 FX Markets Unwinding of long positions in commodity currencies p.8 Disclaimer Page 2 8

3 Economics US economy soldiers on in spite of sequester 1.2 trillion cuts spread over 10 years The 1.2 trillion cuts that will be spread over 10 years are now effective. This is blatantly stupid policy. It does not affect the future course of entitlement spending that will kick in when the population aging will accelerate. As such, sadly, it is not likely to have a positive impact on the future total public debt dynamics. How could this happen? First, democrats and republicans cannot agree on the long term course of fiscal policy, the former broadly preferring tax increases, the latter social spending cuts. Second, its easier for both sides to pick a fight "on principles" on spending cuts equally spread across defense and nondefense spending, than on huge "fiscal cliff" tax rises or a "debt ceiling" induced government shutdown. Economic cycle seems to ignore the sequester This year's sequester cuts might reduce GDP growth between 0.3% to 0.6%. Yet, the Chicago Purchasing Manager Index, and ongoing data from the Housing Market, do not indicate that firms and households are adjusting their plans accordingly. This week's employment data will give very important clues as to sustainability of the current cyclical upswing. Sequester facilitates enduring QE3 During his last week's semi-annual testimony to Congress, Bernanke has downplayed concerns about an early QE3 exit. This is the key factor explaining the stock market's reversal after its earlier losses. Paradoxically, since the sequester might well keep the unemployment rate at 8%, it is likely to induce the Fed to continue QE3 through This raises the long-term concerns about the exit out of unorthodox monetary policy. Yet, it also seems to put some floor to an equity market just coming out of a very impressive rally. Page 3 8

4 FX Markets Italy's election upsets markets The Italian election resulted in an impasse as the winning centre-left bloc failed to secure a majority in the upper house of the parliament (both houses of parliament is needed in order to govern). As a result, the fear of a Eurozone breakup has come back to the forefront. It is in particular not at all clear if the other coalitions, Berlusconi's centre-right and Grillo's Five Star Movement, are somehow willing to support a centre-left government with a pro-euro policy. Mr. Berlusconi has run a campaign based on antiausterity slogans, whereas Mr. Grillo is a wild card who has been bashing most austerity measures implemented by the Monti government. At this stage a centre-left government which some sort of support from Mr. Grillo seems the most likely outcome, but political certainty is not likely to emerge before April. A caretaker government with new elections after the summer would be our alternative scenario. The latest bond auction suggests investors are prepared to give Italy some time. Yet, if political deadlock persists, credit spreads might further widen. The market might then test the ECB's resolve to engage in OMT operations, the implementation of which is conditional on Italy's government underwriting a Memorandum of Understanding on economic policy. ECB to meed amidst renewed spread widening We expect Mr. Draghi not to specifically comment on Italian politics. Given the difficult general economic situation, he is likely to leave all options open, also the possibility of further rate cuts. On the other hand, he is now less pressured to do so since the euro has already substantially depreciated. As a result, we do no expect the governing council to take important new initiatives Page 4 8

5 FX Markets Other important central bank meetings in the week ahead Bank of Japan: creating the basis for further yen weakness We do not expect any change during this meeting as the new BoJ's governor and his two deputies will be appointed on March 19. The elections of Mr. Kuroda as the new governor and Mr. Kikuo Iwata as one of his two deputies reflect a clear shift towards bold easing measures. Therefore, the meeting on April 4 should mark the start of new stimulus from the BoJ. At some point, the increasingly dovish stance of Japan's monetary policy, is likely to reignite the downward trend of JPY of the last months. Bank of England: no limits to QE? The BoE will have also have a new governor, Mr. Carney, in June. This, together with the surprisingly dovish attitude of King (BoE's current governor) and the weak economic outlook could prompt further easing well before the arrival of the new governor. Reserve Bank of Australia: further cuts on the horizon As pointed out by Mr. Stevens, RBA's governor on 22 February, the central bank has a bias to ease, suggesting that the next move in the cash rate should be down. Concerning the timing, domestic growth prospects do not suggest an emergency to cut rates, especially since the recent weakness in the Australian dollar. Bank of Canada: less hawkish? We do not expect any change in the monetary policy, especially with Carney leaving for BoE. However, we will focus on the rhetoric concerning its tightening bias. Further comments suggesting a lesser hawkish stance would continue to put pressure on the Canadian dollar. Page 5 8

6 FX Markets Canadian dollar paving the way for the Australian dollar? The Australian dollar and the Canadian dollar have depreciated recently on the back of weak economic data, suggesting that the start of a tightening cycle might be pushed back further. Indeed, in Australia, the expected peak this year in mining investment and the vulnerability of the housing market, coupled with high household debt, levels could have damaging effects. In Canada, the recent data suggest that the economy is growing at the weakest pace since 2009 keeping inflation below its 2% target. From a technical point of view, the USD/CAD has broken its long-term declining channel (linking the April 2011 high with the April 2012 high), which opens the way for a rise towards the strong resistance at The AUD/USD is now challenging the low of its 7 month horizontal range. A break of the support at would imply a downside risk at Looking at EUR/AUD, we also find a long-term technical pattern favouring a weaker Australian dollar compared to the Euro. Overall, we are waiting for a break of the key support at to ignite a new leg lower for the Australian dollar. The continuing weakness in the Canadian dollar suggests that this trigger could occur in the next few days. Page 6 8

7 FX Markets Unwinding of long positions in commodity currencies The International Monetary Market (IMM) non-commercial positioning is used to visualise the flows of funds from one currency to another. It is usually viewed as a contrarian indicator when it reaches an extreme in positioning. Positions in Swiss franc have crossed into negative territory. We would also favour a short position in CHF, especially against the Euro, given the proximity of the 1.20 threshold fixed by the SNB. We continue to believe that the short positioning on GBP is not extreme enough to be contrarian. On the contrary, the negative economic newflows in the U.K. is likely to lead to further monetary stimulus, which will lead to further depreciation of the British pound. Commodity currencies long positions continues to be unwound. However, we think that further reduction is likely to continue in the next few weeks, hence putting pressure on the Australian dollar and the Canadian dollar. Page 7 8

8 DISCLAIMER No information published constitutes a solicitation or offer, or recommendation, or advice, to buy or sell any investment instrument, to effect any transactions, or to conclude any legal act of any kind whatsoever. The information published and opinions expressed are provided by MIG Bank for personal use and for informational purposes only and are subject to change without notice. MIG Bank makes no representations (either expressed or implied) that the information and opinions expressed are accurate, complete or up to date. In particular, nothing contained constitutes financial, legal, tax or other advice, nor should any investment or any other decisions be made solely based on the content. You should obtain advice from a qualified expert before making any investment decision. All opinion is based upon sources that MIG Bank believes to be reliable but they have no guarantees that this is the case. Therefore, whilst every effort is made to ensure that the content is accurate and complete, MIG Bank makes no such claim. Limitation of liability MIG Bank disclaims, without limitation, all liability for any loss or damage of any kind, including any direct, indirect or consequential damages. Material Interests MIG Bank and/or its board of directors, executive management and employees may have or have had interests or positions on, relevant securities. Copyright All material produced is copyright to MIG Bank and may not be copied, ed, faxed or distributed without the express permission of MIG Bank. Page 8 8