Are FX Traders Getting Ahead of Themselves?
Has ECB Draghi Permanently Killed the EUR Rally? GBP: Saved by Carney
CAD: In Focus on Friday with Trade and Employment
NZD: Extends Losses After Employment Report
JPY: Potential Replacements for Shirakawa
Carney’s testimony to the Treasury Select Committee was more of a focus than the MPC meeting yesterday, but in practice neither really produced anything too substantive, though the Carney comments could be seen as possibly less dovish than expected. Carney’s indication that current BoE stance was probably consistent with “escape velocity” might be seen as an indication that he sees no need for any further easing from the BoE., but this can only be a tentative conclusion at this stage, and there seems little scope for a major sterling rally. Today’s construction output data might be a modest focus, but otherwise there is little to focus on and sterling should trade comparatively narrow ranges around 1.57 for GBP/USD and 0.8540 for EUR/GBP.
The ECB press conference triggered sharp EUR losses yesterday, but we would not expect much more EUR downside form here. The decline in short term EUR rates that led the EUR move down doesn’t really seem justified by any expectation of ECB action, and Draghi’s comments indicated potential reactions to further tightening in monetary conditions rather than any discomfort with the current level of EUR rates or the EUR. Some stabilisation of EUR/USD in the 1.3250-1.35 range consequently seems likely near term.
The USD remains a sideshow with the EUR, GBP and JPY dominating the news yesterday, but today’s US trade data may be of some interest for the USD. Although it has not tended to be a market mover of late, the deterioration in Japanese and UK trade numbers has had an impact on the JPY and GBP, and US trade data consequently has potential to impact on the USD, but for the moment the flat trend in the numbers suggests little reaction is likely. After yesterday’s DXY gains on the back of EUR weakness, a weaker picture seems more likely today as yen strength may now be more of a danger.
The recent rally in the U.S. dollar and Japanese Yen has many traders wondering if safe haven currencies are back in demand. The subtle but clear turn in risk coincides with the consolidation in the S&P 500 below 1515. While it can be said that the ECB’s comments on the euro and the dovishness of the RBA are to blame for the EUR and AUD’s slide against the greenback, it can also be argued that investors got ahead of themselves in the month January. At the start of the year, the enthusiasm in the currency and equity markets was strong but with central banks talking about the downside risks, investors are now starting to think that the outlook for the global economy may not be as bright as they believe. Central banks know that their recoveries are extremely fragile and they will want to avoid creating any additional risks and this may include endorsing a rally in their currency. However, it is important to remember that this is a year of recovery for many countries. The first half may be tough but many central banks are still looking for stronger growth in the second half of the year. For this reason, BK Asset Management believe the pullback in many major currencies will be temporary. This is not to say that there won’t be additional weakness in the near term, but do not expect milestones to broken to the downside.
The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.