Trichet’s “no bias” knocks EUR/USD back in range, but for how long?
Charis Charilaou
Chief Dealer
It’s becoming clearer now, that both the FED’s Bernanke and ECB’s Trichet are doing their best to keep the EUR/USD in range. With a very quiet data week ahead, it looks as though they will succeed for at least another week.
After a relatively good week for the EUR bulls, the ECB on last Thursday raised rates 25bps to 4.25% as expected but gave a “no bias” message to the market which was widely expecting a more hawkish approach. The neutral bias was enough to encourage sellers of EUR/USD which traded at a 10 week high shortly before the ECB press conference before falling down to the 1.5700 area.
The GBP began the week looking on the strong side ahead of the quarterly dividend fixing by HSBC but UK house price data continued on a downward path with Hometrack hitting the 9th consecutive monthly fall of -3.2%y/y and GBP/USD ended the week close to 1.9800 down from the 2.0007 high on Tuesday.
The AUD managed a 24 year high at 0.9667 versus the USD, and also gained ground against neighbours NZD and JPY. In Sweden the Riksbank raised rates by 25bps to 4.5% leaving a positive bias and the SEK managed some gains against the EUR.
The oil price continued its relentless upward drive reaching a new record high on last Thursday trading at $145.85/bbl before correcting to $141 on Monday. Equity markets posted a series of new year lows with the DOW trading on Monday at 11121 down 21.6 % from the high traded last October and although is starting to look oversold in the short term, equity analysts are calling for more losses and a confirmation of a bear market that can take more time to recover. Safe haven flows were directed towards government bonds with US 10 year treasury yields falling down to 3.90.
LOOKING AHEAD
Trichet is scheduled to speak both on Wednesday and Thursday and a confirmation of his neutral stance will be expected. Final Q1 Eurozone GDP Wednesday should be confirmed at 0.8%Q/Q, and 2.2% y/y. In Japan the main highlight is probably the machinery orders release on Wednesday while in the US Friday should see May's trade deficit rise to $63.5bn from $60.9bn. June import prices will be released at the same time and should see another rise by 2.5% while later on Friday the prel. July Michigan index should continue to fall.
The main focus is on Thursday's BOE interest rate announcement with the market attaching about a 10% probability to a 25 bp rate hike. Weakness will be expected in the form of the Halifax house price index which is forecasted at -1.2% m/m and more might also come from NIESR GDP estimate and the Nationwide consumer confidence measure. The BRC shop price index is expected to confirm the ongoing concerns over the food price inflation.
STRATEGY
As was demonstrated by the events of the last weeks, European and US central banks are cautiously trying to avoid the EUR/USD from spiking higher. On the one hand we had the Fed’s Bernanke surprising the market some weeks ago voicing his concern about inflation and the weakening USD only to come some weeks later with a balanced FOMC statement and surprise the market again. And while the market was surprised on ECB’s Trichet comments one month ago that the ECB is in “a state of heightened alertness” and calling for an imminent rate hike and the council’s focus on price stability we were again left wondering last Friday when he said that the ECB has “no bias”. This contradicting rhetoric has managed to keep EUR/USD in range, but for how long? The two banks have different policy mandates – the ECB is concentrated on price stability whereas the FED has a dual mandate of price stability and full employment (growth). The current situation of increasing inflation pressures from the commodity (especially oil) prices and plunging asset (housing, equities and credit) prices cannot help either bank to change their policies now and if the current trend in the above markets does not change we will be calling for higher EUR/USD in the short term. We therefore remain on a strategy of buying the dips unless a big correction happens in the price of commodities and equities or unless the central banks come out with an intervention.
GBP should also come under selling pressure as the UK economy remains trapped between the risk of a deflationary economic slowdown and the risk of an inflationary global commodity price boom. MPC comments lately have been rather confusing and in combination with ongoing concerns about the UK banking sector which were highlighted by the credit downgrade of Bradford and Bingley it is difficult to see how the GBP sentiment can lastingly improve. Real money demand has been helping the pound lately but without this equity-related demand sterling should get weaker and buying of EUR/GBP on pullbacks towards 0.79 is looking attractive heading into the BOE decision.
Disclaimer
This research report or summary has been prepared by TFI PCL from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is provided for information purposes only. Nothing in this report should be considered to constitute investment advice. It is not intended, and should not be considered, as an offer, invitation, solicitation or recommendation to buy or sell any of the financial instruments described herein. TFI PCL accepts no liability whatsoever for any direct or consequential loss arising from the use of this document or its contents.
