FX Daily Planet: New York Open

FX Daily Planet: New York Open

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View for the day

The impact of the surprise (at least as far as its timing was concerned) hike in the Fed’s discount rate continued to reverberate through financial markets in Asia and Europe. Asian stocks fell by 2% or so; European markets by less than half of that. The dollar remains bid across the board, reflecting the widening in short-end rate differentials. The Fed may be at pains to separate liquidity policy from monetary policy but the discount rate hike was nonetheless symbolic in that it starts the long road to an eventual normalization in interest rates .The improvement in spreads should continue to boost the dollar in days to come, notably versus JPY, still one of the most sensitive currencies to rate differentials, but also against EUR and, should stock and commodity markets lose their nerve, versus commodity FX. US CPI today will need to be more benign than the 0.1% core forecast to ease the yield pressure for a stronger dollar.

GBP has been a notable underperformer this morning. January retail sales were weaker than expected at -1.2% but allowing for the uncertainties due to poor January weather this does not count as a major undershoot. What is weighing on GBP is rather the series of disappointing data releases, dovish soundings from the BoE and, following yesterday’s very poor government borrowing numbers, a recognition that GBP is in no sense a safe-haven from fiscal tensions in Europe. Gilts are starting to buckle under the supply strains in a post-QE world in which the BoE is no longer there to absorb 100%+ of the supply and the FX market is starting to wonder whether GBP will be next to feel the strain. In our view a downgrade in GBP to reflect economic and monetary policy risks is long overdue. In line with the sharp move in the spot market, front end vols rose 0.5-0.7 vols across the pairs with 1m vols in GBP/USD jumping the most among the G-10 pairs by 0.7 vols.

Overnight news

GBP: January retail sales fell more than anticipated: -1.2%m/m vs -0.5% consensus forecast.
EUR: Euro zone current account balance showed surplus of EUR1.9bn in December after turning flat to slightly negative in the previous month. Euro zone February PMI services printed slightly below expectation at 52.0 while the manufacturing figure printed above expectation at 54.1 vs 52.7 consensus. Also in Germany PMI services printed below expectation at 51.7 vs 52.4 whiles PMI manufacturing printed much stronger number at 57.1 vs 53.8 consenss. German PPI for January printed well above expectation at -3.4%oya vs -4.0% consensus forecast.
AUD: RBA Governor Stevens said the bank was longer in an emergency mode but cash rates were still around 50 to 100 basis points below normal, and there was less scope for robust demand growth without inflation starting to rise
JPY: Japanese Finance Minister Kan said the U.S. Federal Reserve's discount rate hike was not negative for Japan's economy as it would weaken the yen against the dollar.
JPY: Dec. tertiary sector activity index was weaker than consensus at -0.3% (cons+0.1%)
USD: Feds’ Duke --"a newly announced increase in the rate the Federal Reserve charges on emergency loans to banks doesn't signal any change in monetary providing amid the global financial crisis."
USD: Fed’s Lockhart – “does not see deficit creating a dollar crisis in near term”, “agrees with "extended period" language and says it should be removed when time is right”, "some reserves will have to be drained before interest on reserve effective as policy tool". “does not see asset sales as best early step or first step in Fed exit”.
USD: Fed’s Bullard – “the moving Fed funds rate should be as far away as it ever was". "For the near term, interest on reserves will probably be policy tool","Market is putting too high of a probability on rate increase this year".
Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)
USD: Jan CPI (%m/m, sa) @13:30 (JPM: 0.3, Cons: 0.3); Jan CPI core (%m/m, sa) @13:30 (JPM: 0.1, Cons: 0.1); Fed’s Dudley speaks @13:00
CAD: Dec retail sales (%m/m, sa) @13:30 (JPM: 0.3, Cons: 0.5); Dec retail sales ex autos (%m/m, sa) @13:30 (JPM: 0.0, Cons: 0.3)
MXN: Banxico rate announcement @15:00 (JPM: 4.50, Cons: 4.50)
Overnight price action
FX: USD and JPY outperformed among the majors where GBP weakened the most (-1.1% vs USD).
FX vol: Short-end USD vols continued to trade higher rising 0.5-0.7vols higher.
Commodities: Oil down -1.2% to $78.1/barrel and gold down -0.7% to $1110.3/oz.
Bonds: European bond market only saw marginal moves with Bunds 10yr yield up 3bp and Greece 10yr yield down 5bp.
Equities: European equities traded in the red, posting modest losses of -0.5 to -1.0%.
Technical View for the day
The combination of slightly improved fundamental data in the US and persisting problems concerning sovereign debt in southern Europe keeps the USD particularly in favor of the EUR but also across board. This keeps the pressure on the EUR where projected targets against the USD around 1.3100 are still in focus. Given the fact that stock markets are still holding on to their recent gains commodity currencies remain well bid against EUR but crucial barriers at 1.5001 (EUR/AUD), at 1.9101 (EUR/NZD) and at 7.9158 (EUR/NOK) are in close reach now and could at least trigger an intermediate consolidation in these already stretched trends. It is in this context still advisable to keep a close eye on the S&P500 where key-resistance at 1105 or at 1125 could well trigger a stronger sell-off and only a break above the latter would delay a broader consolidation for a short while. As for the JPY in general, there seems to be a case forming for strong depreciation across board whereas a break above 125.92/126.88 in EUR/JPY and above 92.56/93.12 in USD/JPY would deliver first evidence for this view.
Research from the region you may have missed
The EU and Greece: a little bit of carrot and a lot of stick

https://mm.jpmorgan.com/servlet/PubServlet?skey=R1BTLTM3Njc1NC0w&Name=GPS-376754-0.pdf

UK: Retail sales fell significantly in January due to poor weather

https://mm.jpmorgan.com/stp/t/c.do?i=BB3B5-219&u=a_p*d_376783.html*h_1mbvff6c

Japanese HIA; repatriation flows are likely to increase in March

https://mm.jpmorgan.com/stp/t/c.do?i=BB031-129&u=a_p*d_376617.html*h_-j17udmn

RBA Governor's testimony highlights increased uncertainty

https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-376555-0

ENDS

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