Central Banks Have Forex Jockeying For Positions

Sweden’s Riksbank relies on QE, no rate cut

Dollar bulls feel the pressure

Investors look to FOMC statement for rate timing clues

BoJ and RBNZ no rate change expected

Today’s forex action will be dominated by Central Bank monetary policy announcements. The Fed, the RBNZ and the BoJ are expected to deliver a “no” change in interest rates, but as ever the accompanying statements will be the key for investors.

Earlier this morning, Sweden’s Riksbank decided to ease policy further. This time around the central bank is relying more on QE rather than a lower rate path – they prefer not to take the repo rate further into negative territory.

Swedish policy makers left its main policy rate unchanged at -0.25% (contrary to the consensus expectation of a cut), but more than doubled its government bond purchase programme, from a total size of SEK40b to SEK80-90b. They also lowered its forecast path for the repo rate to show rates unchanged until late 2016.

The option of moving between meetings has been kept open and after the surprise decision to ease policy in March the probability that the Riksbank could cut interest rates again in July should continue to seem very high to investors.

Currency Strength a No

The Swedish Krona (SEK) is again one of the key variables that have been a trigger for this morning’s easing (similar situation for the AUD and the RBA) – it’s deemed too strong for the Riksbank. They expect that expansionary monetary policy will contribute to the SEK “remaining at a weaker level for a longer period of time.” Therefor, expect traders to be anticipating further easing measures (rate cuts, QE, loans to companies and even forex intervention) to be linked to the SEK’s strength. Currently, EUR/SEK (€9.2570) is modestly stronger as the market had been biased towards a rate cut already.

Dollar Squeeze remains intact

U.S dollar bears have found some momentum as U.S. data continues to disappoint ahead of this afternoon’s Fed policy statement. Yesterday, consumers reported feeling less upbeat this month (CB consumer confidence 95.2 vs. 102.6e), adding to the array of downbeat indicators, ranging from weak factory activity, business investing, industrial production and new-home sales. Collectively, softer U.S data has managed to take the wind out the dollars sails over the past few weeks and stall the USD’s strong rally earlier this year.

Investors will be keeping a close eye on today’s FOMC monetary policy statement for clues on how U.S policy makers view the economic recovery, especially after the plethora of weaker data lately. Consensus expects the Fed to adhere to a low rate policy well into the summer, as it waits for the U.S. economy to bounce back from its recent soft patch.

So far, both the forex and fixed income markets are at risk of a sharper adjustment of USD longs and bond longs as the lack of upside on these trades has seen a modest reversal in the last couple of trading sessions. Uncertainty has some investors diligently trying to protect their profits or limit their losses, by cutting these positions. This has contributed to the dollar underperforming and some U.S longer term yields to back up.

For many, USD longs and bond longs continue to be an attractive “core” position. But central bank event risk and market momentum is persuading many to consider trimming theses positions even further. This morning, the EUR has managed to penetrate the psychological €1.10 handle, which now allows the EUR bull investor to focus on the important €1.1062 target. However, for the EUR bull there is a lot of wood to chop through topside, as the majority of the market prefers to own new dollars on EUR rallies. For the fixed income enthusiast, U.S Treasurys are trading in tandem with the weakness in the eurozone bonds. Their core (bunds), semi-core and peripheral debt yields have risen by +5-6bps partially on the back of Greek negotiations hopes.

Australasia to deliver no surprises

For both the RBNZ and BoJ, the market does not expect anything new. The BoJ is unlikely to loosen its monetary policy despite some speculation to do so among some investors. Couple with the fact that the Fed is also unlikely to raise rates soon is the biggest factor preventing a stronger USD/JPY (119.32) and why the market has been confined to such a tight trading range for some time.

Some fixed income traders have priced in only a very “slim” chance of a rate cut by the RBNZ later this afternoon. The majority seems to favor the central bank to be more dovish, triggered by last week’s speech on inflation by the Reserve Bank Assistant Governor. Down under more economists are pricing in an eventual rate cut in New Zealand, but today’s meeting comes too soon (NZD$0.7676)

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European Open – Greek Talks, US GDP and Fed

European futures are pointing to a slightly more positive start on Wednesday, as the “Brussels Group” meets to continue discussions on Greek reforms, while later in the session we’ll get the preliminary reading of first quarter US GDP and the latest monetary policy decision and statement from the Federal Reserve.

Greek Prime Minister Alexis Tsipras yesterday said he believes a deal will be reached by 9 May between Greece and its creditors on the list of reforms that would secure the €7.2 billion in bailout funds that the country needs to avoid default. This would come just before the eurogroup meeting on 11 May, which I would imagine is when finance ministers would approve the deal, and the country’s next repayment to the IMF on 12 May of €763 million.

He did state though that any deal may go to a referendum if it falls outside of the mandate that got him elected. Such a move would likely anger the countries lenders as it could cause further delays and throw another spanner in the works. It would also be a costly exercise and you wonder if Greece can afford to fund itself in the meantime.

Should today’s talks prove productive and some actual progress be made, I think it will make people more optimistic that a deal will be done. Already, yields on Greek 2-year debt have fallen from a high of 30% last Wednesday to 20.07% yesterday, in a sign that traders are more optimistic of a deal being reached. Some remain skeptical that this new negotiating team changes anything but if some progress can be achieved today, maybe that will alleviate some of those doubts.

While all of that continues in the background, attention will shift to the US today as the country releases its preliminary reading of first quarter GDP. It’s been a dreadful quarter for the country and recent earnings, despite currently outperforming low earnings expectations, haven’t been great, especially on the revenue side.

Forecasts for this GDP reading have been gradually lowered throughout the first quarter, to the point that some barely expect the country to have grown at all and a negative reading probably wouldn’t surprise. A number of factors have contributed to this, lower oil prices, strong dollar and poor weather so I don’t think people will come down too hard on it, especially as we saw a similarly poor performance in the same quarter last year.

I guess the big question is what the Fed will make of it during its meeting today. It is expected to announce no change in interest rates later on and release a statement alongside the decision. With no press conference scheduled to accompany the decision, the statement will be scrutinized for any hint at when the first rate hike will come, with some still thinking June. The Fed has stated in the past that the decision is data dependent, although much of the data has been very strong, which suggests inflation, the dollar and earnings are possibly deterring it from hiking rates now.

The FTSE is expected to open 35 points higher, the CAC 18 points higher and the DAX 19 points higher.

For a look at all of today’s economic events, check out our economic calendar.

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Cautious Fed to Push Back on Rate Hike Expectations

The USD fell for a third week in a row after questions arose about the growth of the American economy, and its ability to fend off the negative effects of a strong currency.

The Federal Reserve has expressed its concerns about the strengthening greenback on a number of occasions and the potential impacts various international economic events may have on the U.S. economy. The central bank has made it very clear that it won’t make any move on benchmark interest rates until June at the earliest. That leaves investors again looking to the latest Federal Open Market Committee statement for any change in the language; any hint that could suggest a change is forthcoming.

Economic Data Provides Few Clues

Predictably, recent market analyst and economist surveys show the majority expect the Fed’s first interest rate hike to come later in the year. Fed members’ comments have, as usual, been varied, and it’s clear that there is no unanimous opinion on when the central bank should start tightening monetary policy. Member comments range from a June rate hike all the way to mid-2016 depending on where the hawk/dove spectrum happens to fall. Of late, U.S. economic indicators have been disappointing. Weak factory activity, business investing, industrial production and new-home sales, all have been driving the USD down even while Europe is immersed in the Greek debt-negotiating debacle.

The Fed’s hawks and doves have interpreted negative data differently. The Fed’s hawks and doves have interpreted negative data differently. The more hawkish members see the winter data as transitory, meaning that as warmer weather starts to roll in, the economy will thaw and consumers will loosen their purse strings. Doves, on the other hand, see this as a sign that the economic recovery could not sustain a borrowing cost increase without putting in jeopardy the growth of the U.S. economy.

Birds of Prey Still Circle

Chair Janet Yellen has stressed time and time again that the central bank’s decision is fully data dependant. There is no predetermined schedule for when the first rate hike will be launched as it all hangs on the performance of the U.S. economy. In the past month, the data has not pushed forward the rate hike agenda as consumer confidence and retail sales continue to disappoint. Employment — once the best evidence of a full recovery — has stalled, and doubts remain about the wisdom of raising rates with such a low level of inflation.

The FOMC meeting this week will not show a large shift in monetary policy but the U.S. dollar could be boosted if the rhetoric remains optimistic about the growth of the economy. The FOMC statement will not include a date on when the market can expect a change in monetary policy. But if there are no significant changes to the language that has already seen the removal of phrases and words such as “considerable time” and “patient,” the market will take that as a vote of confidence in the economy, and the USD will subsequently appreciate.

A more dovish FOMC statement would keep the pressure on the USD and further depreciate it versus major pairs. The transitory label on the U.S. economy’s underperformance in the first quarter has mitigated some of the negative effects of the weaker data, but a shift in interpretation by the Fed from temporary to a more systematic malaise could spell another USD selloff, particularly if policymakers show a lack of confidence in the economy. This is unlikely given past statements, and the fact that even within the mix of Fed members’ comments, there are still some voting hawks at the FOMC.

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5 Reasons the UK Economy is Slowing

Whatever Tuesday’s first quarter GDP figures show, the next government should brace itself for a hard landing, according to an economics thinktank.

A report produced by the New Policy Institute (NPI) has described Britain’s economy as “unbalanced” and warns that another recession is inevitable unless various issues are addressed.

Despite the fastest economic growth among advanced economies last year, most City analysts expect the UK to have lost steam in the opening months of this year. The consensus forecast is for quarterly growth to come in at 0.5%, down from 0.6% in the fourth quarter of 2014, when the first official estimate of GDP is published on Tuesday morning. Some economists see the growth rate halving to 0.3%, according to a Reuters poll.

Beyond the latest quarter, the NPI’s experts see several reasons to believe the UK economy is closer to the end of a period of growth than to the start of a sustained recovery.

In their report entitled Beneath the Bonnet: How Sound is Britain’s Economic Recovery? the thinktank looks at headline indicators and conclude that unless imbalances are addressed “another recession is a matter of ‘when’, not ‘if’”.

1. ‘Productivity has barely grown’
2. ‘Weakness behind the employment headlines’
3. ‘Household income has not recovered’
4. ‘Imbalances abound’
5. ‘The coalition scaled back its plan on the deficit’

via The Guardian

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US House Prices Rise in February

U.S. single-family home prices rose in February from a year earlier, led by strong increases in the western half of the United States, a closely watched survey said on Tuesday.

The S&P/Case Shiller composite index of 20 metropolitan areas gained 5 percent in February on a year-over-year basis, besting January’s downwardly revised gain of 4.5 percent. This was also above a Reuters poll of economists that forecast a rise of 4.7 percent.

Denver and San Francisco reported the highest year-over-year gains, with prices increasing by 10 percent and 9.8 percent, respectively, over the last 12 months.

“Home prices continue to rise and outpace both inflation and wage gains,” said David Blitzer, chairman of the Index Committee for S&P Dow Jones Indices.

“While nationally, prices are recovering, new construction of single family homes remains very weak despite low vacancy rates among both renters and owner-occupied homes.”

via Reuters

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Japanese Economy Minister Less Confident on TPP Progress

Japanese Economy Minister Akira Amari played down the prospect of substantial progress in trade talks being announced after a summit meeting between Japan and the United States on Tuesday.

Japanese Prime Minister Shinzo Abe meets U.S. President Barack Obama in Washington.

Japanese public broadcaster NHK said a joint statement after the meeting would probably refer to “substantial progress” in negotiations between the two countries on a trade deal and would talk of them cooperating to move towards an agreement on the 12-country Trans-Pacific Partnership (TPP) trade pact

However, Amari told a news conference: “The most we could expect in a joint statement is to say there is ‘welcome progress’ (on a Japan-U.S. trade deal).”

The trade negotiations between the two are seen as crucial for the wider TPP as their economies account for 80 percent of the group involved in the talks.

Amari said progress had been made on some aspects of the trade talks between the two countries but other aspects were “deadlocked” and he expected the two leaders to instruct officials to make efforts towards an early agreement.

The two leaders are unlikely to discuss details of the trade deal.

via Reuters

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