Events to watch this week…

1. The ECB meets on Thursday and we don’t expect much from policymakers despite low inflation and ECB M3 figures this morning. We saw that Flash inflation remained poor and steady in June (0.5% YoY), and ECB data on M3 Annual growth and Private Loan continue to disappoint. EURUSD recovered from its May losses and is now trading around 1.3650. The next resistance on the topside stands at 1.3672 (which corresponds to its 200-day SMA), followed by 1.3700. We would try to play the 1.3550 – 1.3670 range for the coming days, with a stop loss 50 Below/Above the range.

2. Tonight, the Reserve Bank of Australia is expected to keep its cash rate at a historical low level of 2.5%. We don’t see anything new; perhaps policymakers will try some more jawboning in order to push the Aussie down a bit. AUDUSD has remained pretty much rangy for the past few weeks, trading between 0.9330 and 0.9440. There seems to be a strong resistance zone at 0.9440/60 on the topside and it may be worth trying to sell some if the Aussie gets back to those levels for a test back towards 0.9330 (tight stop loss above 0.9480).

3. The Swedish Krona may continue to be under pressure this week ahead of the Riksbank meeting on July 3. The market is expecting the central bank to cut its benchmark rate by 25bps to 0.5% after CPI contracted by 0.2% YoY in May. Deflation is a drag and economists see it as a concern as it would only add to Sweden’s record household indebtedness. Even if the market is pretty bearish at the moment, we wouldn’t consider entering now as there is little room left. The SEK has depreciated 4.5% approximately against the Euro and the Dollar, and it may enter in an oversold area.

Watch the 2-year yield spreads!

Yesterday evening, while most of the people were watching the World Cup first game’s kick-off, BoE Governor Carney and UK’s Chancellor of the Exchequer George Osborne both gave a speech at the Mansion House. The topic on the table was their concerns about the UK housing market as a rate hike would stress mortgage debt and therefore threaten the recovery. Until now, investors and traders were pricing in a rate increase somewhere in Q2 next year; however, Carney surprised the market by stating the Official Bank rate hike ‘could happen sooner than markets currently expect’. It immediately shifted the UK rate curve higher, with the 2-year now trading at a 3-year high of 0.852%. If we have a look at the chart below, we can see that the UK-US 2-year spread (in red) rose 10bps sending Cable (in yellow) to the roof. After it nearly reached its strong psychological resistance at 1.7000 on May 6, the British pound had entered into a bearish momentum against the greenback until it test its support at 1.6680 (mid-April lows) a few times. Despite strong UK fundamentals, the market is more concerned about the rate ‘neutrality’ debate and which central bank will consider starting raising its benchmark rate early next year.

Cable-2Y

(Source: Reuters)

However, this week’s strong employment data in addition to Carney’s hawkish speech played in favour of the pound which hit its psychological 1.7000 resistance against the US Dollar yesterday. We reached our target on EURGBP at 0.8000 based on our previous article (Some overnight developments), which has also been driven by the 2-year UK-EU yield spread (in orange, reversed scale RHS) as you can see it below.

EG-2Y

(Source: Reuters)

With the FOMC meeting next week, we assume that the volatility will remain low and especially in the FX market. Carry trade currencies (especially the Kiwi) should continue to outperform in this market. We saw yesterday that a currency that will remain under pressure will be the Swedish Krona (SEK) after the CPI came in at -0.20% YoY in May. If deflation continues to stagnate at around 0%, the Riksbank will have to intervene later this year but cutting its benchmark by another 25bps (it currently stands at 25bps), therefore impacting the currency.