FX ‘picking’, who is the one to watch?

For the past couple of months, volatility has declined in all asset classes and traders (and algos) have switched to a range trading attitude. If we have a quick overview of the market, we can see that the S&P500 is still fighting against the 2,100 level, the VIX is gradually approaching its crucial 12 level, core bond yields are trading a bit higher (Bund is up 10bps, trading at 16bps) and EURUSD is trading in the middle of its 1.05 – 1.10 range.

However, in a more detailed analysis, we heard some noise lately that trigger a bit of movements in the FX market.

1. SNB talks, first round…

The first one was the CHF move. A few days ago, I posted on my twitter account a chart (see tweet @LFXYvan on April 19) that I thought could be problematic for the Swiss economy (i.e. SNB). At that time, EURCHF was gradually approaching the 1.0250 level, down from 1.08 a couple of months ago (5% appreciation).

Then, a couple of days later, SNB comments sent he Swissy tumbling, with EURCHF and USDCHF up 150 and 200 pips respectively. In its comments, the SNB announced that it reduced the group of sight deposit account holders (bank account through which transfers in the form of cashless payments and cash deposits and withdrawals can be effected) that are exempt from negatives rates, therefore transferring the ‘negative carry’ to its clients and in hope that Sight Deposits are reduced.

Looking at the charts, it seems that it wasn’t enough to force investors to run away from the Swiss Franc and I think we are on the path to retest new lows on EURCHF and USDCHF. With Swissy becoming once again the safe-haven asset since the end of the floor in mid-January, SNB Jordan will have to do more to prevent the exchange rate from appreciating ‘too much’.

2. Cable: will the ‘hawkish’ minutes floor the currency losses ahead of the UK general election?

Yesterday’s BoE minutes trigger a bit of appetite for the pound and sent Cable to a 1-month high of 1.5070. As you can see it on the chart below, the currency is now flirting with its 50-day moving average, an important resistance that could halt the pair’s late bullish trend.

GBP

(source: FXCM)

To be honest, I didn’t understand the sort of positive GBP reaction based on the central bank’s report. If we look at the big lines, the Committee voted unanimously to keep the Official Bank Rate steady at 0.5% (as expected), and in the 23rd section, it says that policymakers were expecting the 12-month CPI rate to fall into the negative territory at ‘some point in the coming months’. It sounds more neutral (if not so, slightly dovish) than hawkish to me.

With the (uncertain) general election coming ahead, I’d rather keep a short position on Cable, especially at current levels. Conservatives should keep a tight stop at 1.5160 for a first target at 1.4750, however I would widen the room there and suggest a stop at 1.5250 (RR of 1.3).

3. Follow the CAD move

Another mover was the CAD, alongside rising prices for oil, which surged by 6 figures to hit a three-month low of 1.2090 on Friday before coming back to 1.22 (against the greenback). With the Western Canadian Select June futures trading at a 11.50 spread against the WTI and higher than expected inflation rate (1.2% YoY in March vs. 1% consensus), the probability of another 25bp cut from the BoC in order to counter a lower growth economic forecast was revised (lower) by the market. It could potentially cap USDCAD on the upside, first resistance is seen at 1.2280, then the second stands at 1.2400. I would be comfortable with a little short position on USDCAD, targeting 1.2180 at first (stop above 1.2360).

CAD

(Source: FXCM)

4. Trade the Yen from a ‘Technicals’ perspective

I will finish this article with the Yen and Japan latest news. We saw earlier this week that Japan Trade Balance saw a tiny JPY3.3bn surplus (vs 409bn deficit expected) after 48 months of trade deficits. Even though it should be considered as good news (for a country which is expected to see a current account deficit for the first time in 34 years), the reason of that tiny surplus was driven by a collapse in imports, that plunged by 14.5% YoY (the most since November 2009). The Good news for Abe (and Kuroda) is that the stock market closed above the 20,000 level this week for the first time in 15 years, making a least one of the arrows – monetary stimulus – work.
As the Yen still remains one of my favorite currencies to watch on a daily basis, I had a lot of conversations with some friends of mine, and we (almost) all agree each time that the BoJ will lose completely control of its currency in the medium/long term. If you look at Japan core figures (debt-to-GDP ratio of 240% according to the IMF, a declining population with more than 25% Japanese aged 65 or over – out of 127ml, massive stimulus as a share of the country’s GDP…), the problem is easily spotted and the biggest ‘opportunity’ will be in the currency market in the medium term.

However, I am more skeptical (i.e. less comfortable) with the short-term trading. Now that the currency has passed its safe-haven status to the Swissy (see tweet @LFXYvan on March 24), I am usually looking for some buy-on-dips opportunities. Being short USDJPY sometimes scares me in the way that I don’t understand how the market interpret good news or bad news in Japan (therefore I always keep a tight stop for short positions).

One thing I am still comfortable in saying that, in an intra-day basis, USDJPY and the equity market (SP500) are still ‘breathing’ together, therefore one of them will ‘carry’ the other.

The wide range on the pair would be 115.50 – 122, but based on today’s volatility I am looking at the 118.30 – 120.80 window. Any breakout of the window could lead to another ‘readjustment’; something I am going to watch closely. If the currency keeps approaching the high of the range, it could be worth going short at 120.60 with a stop above 121.00 and a target at 119.50.

JPY

(Source: FXCM)

Post FOMC Analysis, Dollar Flash Crashes…

This week has been full of macro events (four central banks meetings – BoJ, Norges Bank, SNB and the Fed), however all eyes were on the FOMC statement that came up yesterday. Dovish stance from Yellen in addition to 2015 forecasts revised on the downside created Dollar ‘Flash Crashes’, with the FX market completely out of control. The US Dollar index was trading around 100 yesterday morning, then went down from 99.50 to 98.00 after the FOMC, and eventually ‘flash-crashed’ after the US close. EURUSD (and Cable) soared by 400 pips (and 500 pips) to 1.1040 (and 1.5160 respectively), USDCHF down 4 figures as well down to 0.9620. The yen was less reactive (which clearly shows the declining Yen Pavlovian response the risk-off environment, USDJPY went down ‘only’ 200 pips to 119.30.

To review the FOMC statement briefly, the Committee revised down all 2015 forecasts since the previous Summary of Economic Projections (SEP) released on December 17 last year. The median dot plot for year end 2015 decreased from 1.125% to 0.625% (down by 50 pips). In addition, looking at the Fed’s dot plot for the year 2016 and 2017, we can see that the median dot for 2016 fell to 1.875% in March (vs. 2.5%) and decline to 3.125% from 3.625% for 2017.

FOMC DOT plot

 (Source: Fed’s website)

Furthermore, if we look at the table below which shows the advance release of the SEP, we can see that the central tendency for GDP this year was decreased to 2.3%-2.7% (from 2.3% – 2.7%), PCE inflation (the inflation measure watched by the Fed as the PCE index covers a wide range of household spending) went down to 0.6% – 0.8%, compared to 1.0% – 1.6% three months ago.

FED Forecasts

(Source: Federal Reserve’s website)

While the Dollar has been recovering all day (especially during Asia, USD index now trades back at 99.40, with EURUSD back down to 1.0660, USDCHF up to 0.9910, Cable down to 1.4740 and USDJPY at 120.80), the market is still a bit ‘stress’ with all core bond yields trading to lower levels (See appendix, Bund at 19bps, US 10Y at 1.95% or UK Gilt at 1.52%) and peripheral EZ bonds trading higher than yesterday’s levels.

As a result, the equity market (S&P500) is back on track after a quick 70-point bear consolidation as I was looking for (see tweet @LFXYvan on Feb 26). If we look at the chart below, we can see that the 100 SMA has acted as a sort of support where the market found some potential buyers-on-dips. Over the past few months, it looks like if the 100 SMA didn’t hold, the 200 SMA was doing the rest of the job (except in mid-October).

SP500

(Source: FXCM)

Even though the equity has lost a bit of ‘power’ since the Fed stepped out of the bond market at the end of October last year (the bear consolidation are becoming more and more recurrent), I still believe there is some potential room on the upside based on yesterday’s comments and readjustments.

I am curious to know how the US policymakers will play the rate hike within the next few months (will there be one in June?), as even if the job market has continued to show some strong figures with a NFP report at 295K in February and an unemployment rate at 5.5% (close to full employment according to economists), there has been a lots a disappointing macro figures. See list below with all the misses in just the past month…

Misses US

 (Source: ZeroHedge)

Earlier today, the SNB left its deposit rate negative at -0.75% and jawboned a bit about the recent CHF appreciation. EURCHF is trading at 1.0550, down 2.5 figures in the past month and potentially ‘hurting’ the Swiss economy (Swiss is also part of the ‘Currency War’ party). Norway unexpectedly left its interest rates unchanged and signalled in its report that another cut was planned to protect the Norwegian economy from the plunge in oil prices. The NOK rocketed against the greenback earlier today, down from 8.37 to 8.07 on this hawkish surprise. As a reminder, Oil (and gas) generate more than 20% of Norway’s output, and the country may be in difficulty if this low-oil-price era persists. Norway may have to ‘tap’ into their sovereign wealth funds – Government Pension Fund Global – (approx. $850bn) in order to support their annual budgets this year. However, the maximum that the government could spend from oil revenue is 4% of the fund (by law).

Otherwise, no surprise from Japan and the BoJ stood firm on Tuesday, leaving its monetary policy unchanged (80tr Yen of asset purchases annually, mostly JGBs), even though policymakers acknowledged that prices might start falling in the coming months. Consumer prices in Japan rose 2.4% YoY in January, the same as the previous two months and down from 3.7% in April last year.

 Appendix: Bonds yields…

BBG

 (Source: Bloomberg)

A CB surprise…

After October 15th last year, yesterday was another insane day in the market. We know approximately the impact of a lower (or higher) NFP report on the US dollar or a lower (resp. higher) than expected EZ inflation rate on Euro bonds; however when the surprise comes from a central bank, we saw the consequences…
But first, I am going to have just one quick digression before going for it, concerning the OMT.

OMT is legal

Almost a year ago, the German Federal Constitutional Court (GFCC) found ECB’s OMT bond-buying program illegal and incompatible with EU and German law. Given that the GFCC only has jurisdiction on matters of German domestic law, it decided to leave judgement to the European Court of Justice (ECJ). In his Opinion on Wednesday, the Advocate General Cruz Villalon observed that the program is compatible with the EU Law and that the ‘objectives are in principle legitimate and on consonant with monetary policy’. He added that the program is ‘necessary as well as proportionate in the strict sense, since the ECB does not assume a risk that will necessarily make it vulnerable to insolvency’. As a reminder, the Advocate General’s Opinion is not binding on the Court of Justice. THe judges are now deliberating and the Opinion is expected to reach its judgment by May.

The Euro plummeted by 100 pips to 1.1730 (9-year low) after the news, but came back above 1.1840 on the back of poor US retail sales figures. As a reminder, retail sales dropped 0.9% MoM on Wednesday, the most since June 2012, and missed expectations of a 0.1% decline.

However, the ‘recovery’ didn’t last very long as the single currency is currently trading at 1.1630 against the greenback. How come?

Definitely unexpected…

Yesterday morning, slightly before lunch time (Swiss local time), the Swiss National Bank announced that it was discounting the minimum exchange rate of 1.20 per Euro (that it has been ‘defending’ for the past 3-1/2 years). It also announced that it would go further into NIRP policy, pushing its interest rate on deposit balances to even more negative from -0.25% to -0.75%.

By letting the exchange rate float ‘naturally’, the consequence were brutal and EURCHF, which had been flirting with the 1.20 over the past couple of months, crashed to (less than) 75 cents per Euro, wiping out every single long EURCHF position, before ‘recovering’ to parity (now trading at 1.0140).

EURCHF

USDCHF is now trading around 0.8700 (back from above parity levels, 1.02 to be precise), and EURUSD was sold to 1.1568 before rebounding.

A Stressed Market

The Swiss curve is now trading in the negative territory for all the maturities until 10 years; the swiss market index tumbled to (less than) 8000 (almost 15 drawdown) and then stabilized around 8,400.

US yields are still compressing, with the 5-year, 10-year and 30-year trading at 1.18%, 1.72% and 2.37% respectively. I added a table below that shows the 10-year overall and definitely summaries the current ‘environment’. As you can see, Greece is the only EZ country where yields are trading at astronomic levels on the fear of a Grexit scenario in 10 days (See article here). I like the expression ‘the Japanization of Global Bond yields’ used by some analysts I read.

Capture d’écran 2015-01-16 à 10.35.47

(Source:Bloomberg)

Our favorites, AUDJPY and USDJPY, both reacted to the SNB comments ‘bringing down’ the equity market with them. AUDJPY plunged from (almost) 97 to 95.30 and is now trading at 95.60. USDJPY broke below 116.60 and dropped to 116.28; before that, it reached a daily high of 117.92 during the ‘early’ Asian hours.

The S&P500 index followed the general move and broke the 2,000 level (closing at 1,992), and is now trying to find a new low. Is it going to be a buy-on-dips scenario once again? Clearly, the equity market is ‘swingy’, however I don’t think we are about to enter a bearish momentum yet and I still see some potential on the upside. Therefore, USDJPY should also help the equity market levitate and we should see the pair back to 120.

Discrete poor US fundamentals

Yesterday was also marked by a poor jobless claims report in the US, which was totally forgotten of course but surged to 316K (vs. expectations of 290K). In addition, the Philly Fed, an index measuring changes in business growth, crashed from a 21-year high of 40.2 in November to 6.3 in January (missing expectations of 18.7), the lowest since 2014. I know these figures are quite not relevant for traders and investors, however I do think it is worth noticing it. As a reminder, US inflation rate (watched carefully by US policymakers) decreased from 1.7% to 1.3% in November and is expected to remain at low levels (between 1 and 1.5 percent).

Overall, the global economy still looks weak, and we saw lately that the World Bank decreased this year’s growth projections to 3% in 2015 (down from 3.4% last June). Major BBs declined their forecasts on oil and expect prices to remain low in the first half of this year. We heard Goldman’s Jeff Currie lately saying that prices of crude oil may fall below the bank’s 6-month forecast of $39 a barrel. Remember the chart I like to watch (oil vs. inflation vs. yields vs. equities).

The next couple of event to watch are of course the ECB meeting on January 22nd, followed by the Greek national elections on January 25 (see below). For the ECB meeting, it is hard to believe that the central bank will do nothing after the SNB’s announcement.

EZrecaps

(Source: MS Research)

ECB shakes the market

In addition to an ‘interest rates corridor cut’ (refi rate down to 5bps, deposit rate to -0.20% and marginal lending rate to 0.30%), the ECB surprised the market today after Draghi announced that the central bank will start buying securitised loans (portfolios of transparent ABS which will include loans to the real economy and real estate assets) and euro-denominated covered bonds in order to boost lending to small and mid-size companies (further details next meeting on Oct. 2nd).

 It was clear that ECB aims to get the total assets of its balance sheet back to the levels seen in  2012, which is to say a 1 trillion-Euro expansion. The ECB balance sheet (total assets) is now standing at 2.038tr Euros according to the EBBSTOTA index from Bloomberg, 34% lower than June 2012 high of 3.1tr Euros. This would bring back the Fed-to-ECB balance sheet ratio (one of the pair’s strong drivers) to 1.22 within the next few years, down from 1.67 where it stands at the moment, therefore adding pressure to the single currency.

 EURUSD started the day quite flat, trading at around 1.3150, before it was sent to 1.3000 at first during Draghi’s conference and even lower below 1.2940 as core European bonds yields turned negative to 2Y as you can see it below. French 2-year yield is now trading at -2.8bps, Austrian 2-year yield at -0.6%. German yields are now negative up to 4 years.

CoreYields(Source. Reuters)

In addition, the Governing Council reduced its growth and annual inflation to 0.9% and 0.6% for 2014, down from 1% and 0.7% respectively.

If you have a look at the picture chart below, which represents the full ‘ECB bailout scheme’ in order to sustain the European economy, you just start to think ‘what else could they do more?’

MRO, LTRO, ZIRP, SMP, OMT… and now T-LTROs, ABS and covered bonds. There are talks that Europe is heading towards a long period of stagnation / deflation period, where QE will be the only [pretended] option to get out of the negative spiral (have a look at Japan since Abe took office in December 2012 and see if QE is the solution).

ECB-bailing-out-Europe (Source: Bawerk.net)

If we have a look at EUR/CHF, it ‘only’ went down 20 pips (bottomed at 1.2044) after the ECB’s action; therefore we think that the SNB has already started buying some Euros in order to protect its floor at 1.2000.

USDCHF broke through the 0.9300 level to trade at 0.9330 earlier this afternoon, slightly below its 50-percent Fibo retracement of 0.8700 – 0.9980. The next resistance on the topside stands at 0.9450, followed by the psychological 0.9500.

CHFSNB(Source: Reuters)