Intraday Market Thoughts Archives

A solid reading on the Philly Fed survey helped markets forget the threat of rate hikes, while threats in Crimea lose their impact. The solid data continued to underpin the US dollar and it was the top performer while the euro lagged. The Asia-Pacific calendar is quiet as the week winds down. Friday's North America session will be dominated by the twin release of Canadian retail sales and CPI, which will be highly scrutinized after BoC governor Poloz's soft guidance for inflation.

The Philly Fed rose to +9 compared to +3.8 expected and helped the US dollar to the highs of the day despite the employment component at the lowest since June 2013. On the data, EUR/USD broke below 1.3750 briefly and cable hit a one-month low of 1.6480. Both pair later rebounded and US trading ranges were tight overall.

Other economic data included initial jobless claims at 320K versus 325K expected and existing home sales in line with estimates at 4.60M.

The Crimean crisis continues to simmer but traders are having a difficult time envisioning the scenario escalating. The US added 20 names and a small bank to the sanctions list and Russia immediately responded by imposing similar sanctions against high-ranking politicians. In effect, it's all political theatre with the vast bulk, if not all, of the assets out of each other's reach.

It's difficult to see real economic sanctions unless Russia invades Eastern Ukraine and the Russian defense minister reportedly told the Pentagon in a call Thursday that troops will not enter Ukraine. Even headlines of militias seizing Ukrainian ships failed to rattle the market.

Markets usually react to novelty and the single new development in yesterday's FOMC statement was the forecast for earlier than anticipated rate hikes in the Fed projections. The hawkish projections are a challenge to the Bernanke-Yellen notion that tapering does not imply tightening, especially as bond yields showed their biggest daily rise in 4 months. The real challenge will occur after the April taper, when further tightening of US credit markets (rising yields in anticipation of earlier rate hikes) – combines with a slowing China and worries from US earnings ahead of higher rates. Expectations of higher rates are not necessarily bearish as long as post-winter macro-economic momentum extends into Q3. Failure to do so, will force the Fed to highlight the vagueness of its guidance and keep rates low beyond 2015. Full chart & analysis.

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A rate hike is one of the most straight-forward trades in markets – you buy the currency – so when the Fed projections and Yellen's comments suggested hikes sooner, the US dollar soared. USD was easily the best performer while JPY lagged and CAD fell to a four-year low.

The Fed's $10 billion taper and elimination of the 6.5% employment threshold were no surprises. The 6.5% pledge was replaced with a promise to look at a broad range of employment and inflation indicators and a statement saying it's “likely” to keep the Fed funds rate unchanged until a “considerable time” after the taper ends.

The statement itself wasn't hawkish and didn't hold any surprises but the Fed also released forecasts and they showed a few Fed members inching rate forecasts higher, suggesting more willingness to raise rates last year. Yellen was quick to downplay those forecasts in the press conference, saying almost nothing had changed in the Fed's collective mind since December.

However, Yellen followed that with by saying a “considerable time” is about 6 months. That comment added another leg to dollar strength because it gives a rough timeline for the first rate hike. If the taper winds down in late-October, as expected it would mean a rate hike around this time next year. That's 3-6 months faster than the market was expecting.

The dollar ended about a cent higher across the board. There were some technical damage in all the dollar pairs but cables break below the March lows and USD/CAD's break to a 3-year high were the most notable.

Look for Fed members to appear in the financial media in the days ahead to try to re-calibrate expectations. They will not want to be boxed in by Yellen's timeline.

Early in Asia-Pacific trading the New Zealand dollar fell even through Q4 GDP rose 0.9% to meet expectations. The market was looking for something better after strong recent trade data. The prior quarter was also revised down to 1.2% from 1.4%.

A rate cutting hint from Poloz cut down the Canadian dollar while a soft Western response continued to characterize Crimea and boost risk trades. The kiwi and aussie were top performers while the loonie lagged. Japanese trade balance is the highlight of the trading calendar with the FOMC meeting due in the day ahead.  

Sizeable moves and significant volatility characterized US trading. The biggest move came in the Canadian dollar. USD/CAD fell to a one week low in early trading as commodity FX and risk trades rallied but it was quickly clear there would be no appetite to buy the loonie. Poloz sparked two waves of USD/CAD buying, the first after he warned that Feb inflation would be low and Q1 GDP soft. The second was when he responded to a journalists' question to say he wouldn't rule out rate cuts if downside risks to inflation rose. USD/CAD rose more than a cent on the comments.

A final piece of bad news hit the loonie when long-serving Canadian finance minister Flaherty resigned. He was a deficit hawk and his replacement will be more apt to spend after the budget is balanced in 2015.

Economic data included a slightly soft reading on Feb US CPI at 1.1% y/y compared to 1.2% expected but it won't change the Fed's decision to taper $10 billion on Wednesday.

The main market focus remains the Ukraine. Putin struck a balanced tone in a nationalistic speech after annexing Crimea and said Russia isn't interested in taking over Eastern Ukraine. That sent risk assets higher but markets were still cautious awaiting a White House response. The response was limp as the US said its G7 allies will meet next week to discuss Crimea. That gave a boost to stocks but USD/JPY was curiously saggy and tested 101.20 once again. That will be a critical level in the day ahead. 

One event that could help or hurt the yen is the February trade balance data due at 2350 GMT. A 600B yen deficit is expected.

CAD has shown some sessions recently but its knack to increasingly become the day's worst performer reflects the broadening bias from hedge funds betting on Canada's anticipated weakness (PIMCO & Bridgewater). Many traders have wrongfully equated CAD with USDCAD, which is not necessarily accurate due to the emerging weakness in the US currency. Today's remarks from Bank of Canada governor Poloz giving soft guidance over Q1 GDP as well as Friday's upcoming release of February CPI. We highlighted in our “FxPerformance Special” how the relationship between FX performance in January and the rest of the year may have some serious implications for the loonie in 2014. While attention is on USD and GBP ahead of tomorrow's FOMC and UK Budget, we reiterate our Premium Insights longs in AUDCAD and USDCAD from Feb 5th & Feb 24th as well as shorts in CADJPY (last week's entry), all of which are nearing their final targets. AUDUSD long from Feb 24 at 0.8980 awaits final 0.9140.

The US delivered its response to the Crimean referendum and it certainly didn't mark an escalation of the crisis. The Australian dollar was the top performer while the yen lagged in a classic risk rally. The RBA minutes and Chinese property price data are due later.

The focus of trading on Monday was how the US would respond to the Crimean referendum. Last week, risk trades slumped after Secretary of State Kerry promised a “serious series of steps” on Monday if Russia allowed the referendum to go ahead.

The US and EU response was to freeze the personal assets of 11 top Russian and Ukranians related to Crimea. It was far short of what was feared and even some of the people who were sanctioned mocked the efforts, saying they had no assets within the reach of the US.

The sanctions from the US were so soft that Russia probably won't respond. The market sees it as a de-escalation of the crisis and/or an admission that Crimea is lost. Risk assets rallied with the S&P 500 gaining 1%.

Russia took steps to recognize Crimea as a sovereign state but that's likely just a formality on the way to annexation, which could come as soon as Tuesday.

Risk trades also benefited from mildly positive US data. Industrial production rose 0.6% in Feb beating the 0.2% consensus. The Empire Fed was fractionally below expectations at 5.61 vs 7.00 expected.

Looking ahead, at 0030 GMT, the RBA releases the minutes of the March meeting but with Stevens in wait-and-see mode it's a low risk event. 

At 0130 GMT, China releases property price data for February. On Monday, a Chinese property development firm with $560m of debt collapsed so there could be extra attention on the sector.

Poland's high exposure to German imports and minor exposure to China has enabled it to leverage off the Eurozone recovery and to remain shileded from China's broadening weakening. Full chart & analysis.

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Crimea's vote to join Russia was largely anticipated but the response from the US and Europe is a wildcard. Initial moves to start the week have been minor. Last week, the yen was the top performer while the pound lagged. Weekly positioning data showed why yen traders got squeezed last week.

Results of the referendum showed the people of Crimea voted 95% in favor of joining Russia but the Ukraine and West won't regard the results. The next move belongs to Russia, who will probably begin the process of annexing the region. Last week the US promised sanctions against Russia on Monday if the referendum went ahead. Following up that pledge will be the key in the day ahead.

Early rumblings suggest the sanctions won't be severe and could target the wealth of Russian oligarchs in offshore enclaves. Russia may accept something along those lines as the cost of doing business or could launch countering sanctions. In that case, the market will be frightened of an escalation and JPY will continue to rally. 

Alternatively, there may be a path for tensions to subside. Russia's foreign minister on Friday said there are no plans to invade Eastern Ukraine and on Sunday defense ministers from Russia and Ukraine agreed to a truce in Crimea until March 21.

The other noteworthy piece of weekend news was a decision by China to widen the daily yuan trading band to +/- 2% of the reference rate. Alone, this shouldn't have an impact on the market but don't rule out a USD move.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +

EUR +36K vs +23K prior JPY -99K vs -79K prior GBP +22K vs +30K prior AUD -40K vs -41K prior CAD -52K vs -61K prior CHF +9K vs +2K prior NZD +14K vs +13K prior

A sizable shift in yen shorts came at a bad time as those traders quickly fell underwater and probably helped exaggerate the move down in yen crosses late in the week.