Is The EUR Bear Getting Impatient?

With little new data to chew on, the forex investor continues to wander in a No Man’s Land of tight contained range trading. Capital markets have been expecting a much more aggressive break out, especially with the EUR after the European Central Bank (ECB) introduced new monetary easing measures.

Nevertheless, with option barriers 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 European 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 gross domestic product (GDP) projections. Global growth outlook was lowered to +2.8% versus last January’s +3.2%, mostly due to weaker and developing economies including the BRICs (Brazil, Russia, India and China). China’s outlook was lowered to +7.6% versus +7.7%, the U.S. forecast cut to +2.1% versus +2.8%, Japan to +1.3% versus +1.4%, and the eurozone 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). The U.S.’s GDP is expected to rebound to +3% in the next two years, while the eurozone’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 Washington-based World Bank warned the emerging market contingent to expect headwinds given their lack of unwillingness to implement policy changes in many countries.

British Jobs Data Improves Again

Despite growth cuts putting global bourses under pressure this morning, the U.K. has produced a pleasant surprise on its jobs front, resulting in further support for sterling. The U.K. 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 a more dour note, the average earnings fell to +0.7% (forecast +1.2%, previous +1.7%). This highlights the ongoing squeeze in household finances, a concern for Bank of England Governor Mark Carney, who is well aware that the U.K.’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, it should only manage to temporary break the EUR bear intentions.

Following interest rates and spreads can give investors a heads-up to most currency positions. This has been the nature of capital markets ever since the Group of 10 central banks pursued a policy of low interest rates. A low volatile trading environment strongly supports the carry trade, a common forex market strategy in which an investor borrows money at a low interest rate in order to invest in an asset that is likely to provide a higher return. Euro peripheral spreads are improving again after a 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 for periphery bonds in particular – Spain, Italy, and Ireland have or will be trading through U.S. 10’s because of this demand.

The correlation between higher U.S. yields and a higher USD/JPY (¥102.06) seems to be temporarily broken. This currency pair is generally a good proxy for investor risk appetite. Currently, higher yields translate into higher asset market volatility, which is driving JPY repatriation. With European front-end rates lower than Japan’s, investors will probably use EURs 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.

New Zealand Rate Hike Expected

Later this evening, the Reserve Bank of New Zealand (RBNZ) is widely expected to hike rates by +25bps for a third consecutive time to +3.25%. The market will look to Governor Graeme Wheeler to spring any surprises via forward guidance. Like most central bankers, the governor is not keen 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 decision and the kiwi dollar should come under immediate renewed pressure.

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