News and Events:
Carry play is not done yet
Emerging market currencies in general have performed extremely well since the beginning of the year and this in spite of tighter monetary policy expectations in the US. The whole picture got brighter for emerging markets as commodity prices rose and investors became more optimistic about global demand as Trump took office. The risk embedded in EM trades improved continuously over the last few months as 5y sovereign CDS narrowed substantially (Brazil -20bps, Mexico -17bps, Turkey -15bps, South Africa -15bps), while implied volatility on EM crosses almost vanished. Carry trade plays returned in force this year as investors were eager to harvest returns in this low yields environment.
After this great start into the year, investors preferred to take profit on their long carry positions ahead of next week FOMC meeting. However, we believe that EM currencies with low domestic/political risk still have some room for further appreciation should Trump’s economic boost story comes into play, eventually. Regarding the Federal Reserve, next week’s rate hike is already priced in, therefore the risk is mostly on the downside in USD. We maintain our long INR view, while we believe the rally in the Brazilian real may resume. From a more general standpoint, the long USD speculative positioning, as reported by the CFT, has been continuously decreasing over the first quarter to reach the lowest level since July 2016. Obviously, commodity currencies showed the largest increase in long positioning as commodity prices recovered.
US ADP data not likely to hurdle a March rate hike
After years of patience and false hopes it seems almost certain that the Fed will raise rates next week. However, we believe that rates will not go above 2% within the next couple of years especially as the majority of the very indebted economic institutions would not be able to reimburse credit, loans or mortgages.
Whatever the ADP data, which is expected to come in at 187k new jobs in February, it will not significantly change market pricing for a rate hike, which is now estimated around 96%. We believe that even a low number would not cause the Fed to stop its tightening. US yields are also on the rise, the 2-year yield has broken 1.3%, which represents its highest level in nine years. Markets are remaining cautious with most expecting US rates to be at 1% – 1.5% by year-end.
Indeed, credibility is one major issue with the Fed. We still believe that the rate path is overestimated and that the USD may face further weakness in the medium-term. It is clear to us that after years of patience, the Fed must raise rates to preserve its credibility. Since last year, inflation has picked up but other fundamental data remains mixed. Rates may be set to increase but should remain low for some time. In the longer-run, we would rule out any rate hike above 1.25%.
Today’s Key Issues (time in GMT):
- Jan Industrial Production MoM, exp 1,00%, last -0,20%, rev 0,00% TRY / 07:00
- Jan Industrial Production YoY, exp 1,80%, last 1,30%, rev 1,60% TRY / 07:00
- Jan Industrial Production SA MoM, exp 2,70%, last -3,00%, rev -2,40% EUR / 07:00
- Jan Industrial Production WDA YoY, exp -0,60%, last -0,70%, rev -0,10% EUR / 07:00
- Jan Trade Balance, exp -3800m, last -3421m, rev -3569m EUR / 07:45
- Jan Current Account Balance, last -1.1b, rev -1.2b EUR / 07:45
- 4Q INE House Price Index QoQ, last 0,80% EUR / 08:00
- 4Q INE House Price Index YoY, last 4,00% EUR / 08:00
- Jan Industrial Output NSA YoY, last -1,60%, rev -1,50% EUR / 08:00
- Jan Industrial Output SA YoY, exp 2,40%, last 1,90%, rev 2,00% EUR / 08:00
- Jan Industrial Production MoM, exp 0,20%, last -0,50% EUR / 08:00
- Feb CPI MoM, exp 0,20%, last 0,00% CHF / 08:15
- Feb CPI YoY, exp 0,40%, last 0,30% CHF / 08:15
- Feb CPI EU Harmonized MoM, exp 0,20%, last -0,20% CHF / 08:15
- Feb CPI EU Harmonized YoY, exp 0,40%, last 0,30% CHF / 08:15
- Jan Household Consumption (MoM), last -2,10%, rev -1,60% SEK / 08:30
- Jan Household Consumption (YoY), last 0,70%, rev 1,40% SEK / 08:30
- Feb SACCI Business Confidence, last 97,7 ZAR / 09:30
- mars.07 FGV CPI IPC-S, exp 0,35%, last 0,31% BRL / 11:00
- Jan Industrial Production YoY, exp 1,00%, last -0,10% BRL / 12:00
- Jan Industrial Production MoM, exp -0,40%, last 2,30% BRL / 12:00
- mars.03 MBA Mortgage Applications, last 5,80% USD / 12:00
- U.K. Spring Budget GBP / 12:30
- Feb ADP Employment Change, exp 187k, last 246k USD / 13:15
- Feb Housing Starts, exp 200.0k, last 207.4k CAD / 13:15
- 4Q F Nonfarm Productivity, exp 1,50%, last 1,30% USD / 13:30
- 4Q F Unit Labor Costs, exp 1,60%, last 1,70% USD / 13:30
- Revisions: Productivity and Costs USD / 13:30
- 4Q Labor Productivity QoQ, exp 0,40%, last 1,20% CAD / 13:30
- Jan Building Permits MoM, exp 3,00%, last -6,60% CAD / 13:30
- Jan F Wholesale Inventories MoM, exp -0,10%, last -0,10% USD / 15:00
- Jan Wholesale Trade Sales MoM, exp 0,50%, last 2,60% USD / 15:00
- mars.03 DOE U.S. Crude Oil Inventories, exp 2000k, last 1501k USD / 15:30
- mars.03 DOE Cushing OK Crude Inventory, exp 406k, last 495k USD / 15:30
- Currency Flows Weekly BRL / 15:30
- Feb Foreign Direct Investment YoY CNY, exp -4,20%, last -9,20% CNY / 23:00
The Risk Today:
EUR/USD is moving lower. Hourly resistance is given at 1.0679 (16/02/2017 high). Hourly support at 1.0521 (15/02/2017 low) has been broken. The technical structure suggests deeper consolidation towards 1.0500. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD has broken support given at 1.2254 (19/01/2017 low). The road is wide-open for further decline. Hourly resistance is given at 1.2214 (intraday high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY is showing limited short-terms buying interest after reversing off base lows. Key resistance is given at 115.62 (19/01/2016 high). The technical structure suggests further weakening towards 112.00. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF continues to improves after testing 1.0021 support. Hourly resistance is implied by upper bound of the uptrend channel. Key resistance is given at a distance at 1.0344 (15/12/2016 high). Expected to see further strengthening. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.