EUR-USD: It seems verbal jousting has spread to Frankfurt where various ECB officials have been busily doing the rounds proclaiming that ‘no decision has been taken upon negative deposit rates’, the latest being ECB Vice-President Constancio yesterday. This is despite the fact that we know of commercial and retail banks already being technically prepared for such an eventuality and the fact that the ECB has been analyzing the effectiveness of such a move. In our view negative rates are not so much an option but an eventuality. Aggregate inflationary developments across the euro zone remain muted (despite yesterday’s higher than expected German CPI print) whilst unemployment continues to surge ever higher. Given that governments remain fiscally constrained, it stands to reason that the only way to stimulate aggregate demand is via ever looser monetary policy: say hello to negative rates.
For the moment however USD price action remains in the driving seat of the cross. Indeed yesterday was another case in point, with the EUR-USD up move following down moves made in USD-JPY. The main data releases in the US today are the Q1 GDP revision where expectations are for a print of +2.5% and Initial Jobless Claims. Given that recent data re-lease correlations have tended to work in favour of stronger USD exchange rates we rec-ommend selling into rallies in EUR-USD.
CHF: This morning’s Swiss Q1 GDP print of +1.1% yoy should ease the concerns of those market participants who have been expecting an increase of the minimum bound in EUR-CHF from 1.20. Recent export data has been poor and the main culprit, aside from generally weak export markets, is thought to have been the strength of the franc. Given that GDP printed above expectations, this gives the SNB less room for manoeuvre with respect to the minimum bound. That said, our base case remains that the SNB are unlikely to do anything drastic in this regard. If they were going raise the minimum bound, they would have already done so.
JPY: Last night’s BoJ data releases showed that Japanese investors were net sellers of foreign bonds over the previous week, by some ¥1117 billion. Once again those investors who were expecting so called ‘wall of money’ flows from Japan were disappointed such that USD-JPY dipped in the aftermath of the release. Frankly I find this price action puzzling. The BoJ are clearly set upon ramping up inflation and depreciating their currency over the me-dium to long term, so why stand in the way if one or two weeks flow data are not in line with expectations? Irrespective of the merits and demerits of the ‘wall of money’ theory, 2 year swap spreads are starting to move decisively in favour of higher levels in USD-JPY. To me it is abundantly clear that the short JPY trade has farther to run.
Emerging Market Currencies
BRL: COPOM last night took the market by surprise and raised target selic rates by 50 basis points against expectations of only 25 basis points in a unanimous vote. This comes after inflation data printed too close for comfort to the central banks upper limit at 6.5%. If anything the move is a statement of intent from the central bank whose credibility has been increasingly questioned in recent months. USD-BRL has been trading higher recently in large part due to the broader USD move, however higher selic rates should put the lid on any further up move in the cross over the short term.
FX Today with Richard Nunes
