Intraday Market Thoughts Archives

With 9 words ECB President Draghi blew out euro longs. The euro was the worst performer on the day while the loonie led the way. Chinese CPI is due later.

“The governing council is comfortable with acting next time,” Draghi said with the caveat they want to see the June staff projections first. Those will very likely include a downgrade to inflation forecasts and clear the way for some combination of a lower refi rate, negative deposit rates and/or QE.

The comment didn't come until 22 minutes into Draghi's press conference. The comment hit like a bolt of lightning out of the blue because his statement and early part of his comments was mundane and repeated previous comments. The euro crept as high as 1.3993 as he spoke but was hammer down more than 1.5 cents afterwards and finished at the lows of the day.

The turnaround leaves a swath of reversal patterns on the euro charts. Analysts have already begun to predict moves in June and the parade will continue in the day ahead, keeping pressure on the euro.

EUR/CAD was particularly hard hit, down 2.5 cents and falling below the 100-day moving average for the first time in a year. USD/CAD also fell below the April low of 1.0858 in a round of broad loonie strength. Some bullish comments from China's new ambassador to Canada supported the move but it felt awfully suspicious ahead of Friday's Canadian jobs report.

The US dollar wasn't particularly strong despite some decent economic data. Initial jobless claims were at 319K compared to 325K expected and 345K last week. Yellen spoke in the second day of Humphrey Hawkins and didn't make any splashing headlines but comments like “the Fed won't raise rates unless the recovery is strong” make traders wonder if they'll ever rise.

Next up is China CPI at 0130 GMT. This report isn't as important as it was a few months ago because stimulus isn't on the table but that can changed quickly. The consensus is for a 2.1% y/y rise. 

The current divergence between falling dairy prices and rising NZ dollar cannot be ignored considering New Zealand is the world's biggest producer and exporter of dairy products. And since the Reserve Bank of New Zealand has begun threatening to intervene against the strong kiwi, the current divergence appears dificult to ignore. The chart below shows what happened when there was such a divergence. Chart & analysis

Day 1 of Yellen's testimony failed to provide any fireworks but the market detected a slightly dovish bent. The US dollar was the top performer on the day while NZD lagged. The focus now shifts to the Australian jobs report.  

Yellen followed up the optimistic FOMC statement by noting a pickup in the economy but she also outlined downside risks to inflation like slack in the labor market, the lack of investment and disappointment in housing.

There was nothing in her testimony to suggest a rush to raise rates and the bond market rallied once again. US 10-year yields continue to flirt with the 2014 lows and that 2.568% level is probably the most important support line in all of markets at the moment. The low today was 2.575%.

One spot of positive news on inflation was the Q1 US labor cost report showing a 4.2% compared to 2.6% expected. Unfortunately the rise came on falling productivity. Together it points to a weather-related skew but it's something to watch in the months ahead.

We wrote yesterday about the inability of gold to rally when the dollar was weak. That proved to be a signal as gold fell $18 Wednesday on very light USD strength. The 100-day moving average at $1285 caught the latest move and that's a mark to watch in the day ahead.

Up next is the Australian jobs report at 0130 GMT. Unemployment is expected at 5.9% from 5.8% with 8.8K jobs created. The full-time/part-time breakdown is always an important component of the report and AUD will be highly sensitive to the data. 

The other highlight of the session is Chinese trade balance at 0200 GMT. The surplus/deficit is less important than rises in imports and exports, which are expected down 3.0% and 2.1% respectively.

Currencies & bond yields are little changed after Fed Chairwoman Yellen's speech balanced the positives of expecting higher 2014 growth and the negatives of expressing concern with downside risks to inflation. As GBPUSD nears $1.70 for the first time in 5 years, we issue our latest GBP Premium trades with the single chart highlighting the reason to GBP outperformance since late last summer via real 2-year yields and currency performance vs gold for GBP, EUR, USD and JPY. Tomorrow's Bank of England announcement is of the first MPC meeting following the unemployment rate's decline below the 7.0% formerly used as a forward guidance threshold for higher rates. No change is expected tomorrow but look out from any released statements. And let's not forget next week's employment report and the quarterly BoE inflation report (1-day after), which will shed some hawkish light on the notable improvement in labour markets even if inflation remains low and slack is considerable. it Our Premium service had been issuing GBPUSD longs since late June.

If the dollar reversal after non-farm payrolls was the warning shot, Tuesday was the artillery assault as the buck fell hard. AUD made the largest gains against the dollar but the weakness was broad based. New Zealand employment and the BOJ minutes are next.

Several events conspired to undercut the dollar with memories of the inability of USD to rally after payrolls fresh in the minds of traders. The first moves were pound and euro strength after upbeat data. They neared the key 1.70 and 1.40 levels, respectively and chased out dollar bulls.

The dollar weakness began to cascade to other pairs and a moderately soft trade report was enough to push it over the ledge. The March deficit was $40.38B compared to $40.30B expected but the composition of imports and exports led to more Q1 growth cuts, some to as low as -0.6%.

One asset that failed to take advantage of dollar weakness was gold, which declined $2 Tuesday. Bonds are also arguing for safe havens but gold hasn't been listening. That could prove to be an early warning sign.

An underappreciated bullish headline for the euro was a German government deal with the construction union that represents 760K workers. They will get a pay hike of 5.7% between now and June 2015 plus an additional 0.7% to workers in eastern Germany.

Those agreements often set the standard for workers elsewhere and will keep ECB disinflation fears at bay. Another good sign for the ECB is the periphery bond market where Spanish and Italian yields fell to record lows, putting a nail in the eurozone sovereign crisis coffin.

Japanese markets re-open after Golden Week holidays and that should keep things moving in Asia. If not Q1 New Zealand employment is at 2245 GMT. That's followed by the BOJ minutes at 2350 GMT, Aussie retail sales at 0130 GMT and the China HSBC services PMI at 0145 GMT.

The market is highly sensitive to economic data at the moment and all those releases are notable.

More signs of a Spring pickup in the US economy emerged in the ISM services report. The data gave a lift to the US dollar and helped turnaround a sour mood. Asian trade could be crimpled by holidays in Japan and Korea but it will be busy Down Under with the RBA decision on tap. 

The ISM non-manufacturing index was the highest since August at 55.2 compared to 54.1 expected. It's a better sign that companies were restrained in the cold winter months. Especially impressive was the jump in new orders to 58.2 from 54.3.

The battle lines continue to be drawn in ECB-land. The EU lowered its growth and inflation forecasts and the ECB is more likely to do the same in June. Signals about low inflation worries will be the focus of Thursday's decision but today Mersch said he doesn't see any deflationary risk in the medium term.

The news and events Monday had a disappointing impact of FX as USD/JPY dropped to 101.89 in the early going then bounced back to 102.12 to finish the day. Holidays in Europe may have played a part in the narrow ranges.

Going ahead, keep a close eye on US Treasury yields. The 10-year note continues to test support as it touched 2.56%, only to bounce back to 2.61% on the ISM data. A break to the downside could finish off the USD/JPY bulls.

The first event on the upcoming calendar is at 0030 GMT with Australian trade balance for March. The surplus is expected to drift down to $1.0B from $1.2B but it's not likely to jar markets with the RBA decision following at 0430 GMT. The RBA has backed away from active AUD jawboning but the statement should continue to say the Aussie is high by historical standards. The outlook overall is little changed in Australia but less-worrisome language on employment could be a catalyst for AUD/USD.

Fighting in Ukraine is now broad based and the central authorities have little control as the country edges to the brink of civil war. Early FX moves have been small; last week NZD led and AUD lagged. We look at the BOE's options and the latest positioning data.

The deaths three dozen pro-Russia activists in Odessa Friday probably marked a turning point in the Ukraine conflict. Fringe movements have grown organized and grievances have been stoked. We don't see any likely path toward normalization and a long period of instability is ahead.

At this point, most of the damage is priced into markets. The Ukraine is a miniscule economy and so long as Cold War politics don't escalate, the risks are contained.

So the markets will turn to economic data in the week ahead that includes the ECB, BOE, ISM non-manufacturing, US & Eurozone CPI and the Australian employment report.

The Bank of England has been a focus as expectations of a rate hike sometime around Q3 2015 mount. The pound was the best performer in April but consider Carney's playbook at the BOC before betting he will hike rates to cool off the housing market. In Canada, he lobbied the government to tighten mortgage rules and the FT reported on Sunday that new housing regulations are under consideration.

If the BOE is successful in cooling the home market without tightening policy, it may push out expectations for hikes and cool cable as it tests the 2009 high and the 100-month moving average.

On the weekend, China released the non-manufacturing PMI and it showed a slight expansion to 54.8 from 54.5 in March. Later this week China releases trade balance.

Commitments of Traders

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

• EUR +26 vs +26K prior
• JPY -70K vs -67K prior
• GBP +44K vs +48K prior
• AUD +11K vs +16K prior
• CAD -30K vs -35K prior
• NZD +18K vs +20K prior
• CHF +14K vs +14K prior

The market was hesitant to switch out of positions ahead of all the data that came later in the week. One spot where traders were backpedaling was in AUD, where positions had been building for several weeks.