- EUR/USD: We maintain our bullish view on the pair as the ECB makes clear its intention to stay on the sidelines, as it awaits more data before adjusting QE, while the Fed will most likely have to delay US rate hikes
- NZD/USD: Continues to move towards the next support at 0.7235 as it would require a more than 25bp cut to keep investors away from the Kiwi as the chase for higher returns continues to drive their investment decisions
- USD/NOK: With its mounting inflationary pressure and an encouraging growth outlook, the risk is definitely skewed to the downside
- We continue to believe that Italian banks could trigger further banking disruption in the Eurozone as recent stress tests show that the €360 billion of bad loans pose a major threat to the stability of the European financial system
- SNB remains deeply under pressure and in our view, Swiss policymakers remain on the edge but ready to act at any time
- We remain bearish on the EURCHF as any evidence of turmoil could send the CHF higher
At the end of a busy week, most G10 currencies have somewhat stabilised. After surging 0.80% in the wake of the FOMC rate decision, the single currency eased slightly to 1.12. Overnight, EUR/USD was little changed and traded within a very tight range between 1.1194 and 1.1212. We maintain our bullish view on the pair as the ECB made clear it would rather stay on the sidelines, waiting for more data before adjusting its quantitative easing program, while the Fed will most likely have to delay US rate hikes.
The New Zealand dollar was the worst performer amongst the G10 complex, siding 0.45% against the greenback as investors raise bets on an upcoming RBNZ rate cut. Indeed, even though the Reserve Bank decided to leave the official cash rate unchanged, Governor Wheeler reminded markets that further policy easing will be required to ensure that inflation moves closer to the target. NZD/USD has continued to move toward the next support standing at 0.7235 (low from September 13th).
Unfortunately for the RBNZ, it would require more than a 25bps cut to keep investors away from the Kiwi as their chase for higher returns will continue to drive their investment decisions. Therefore, we believe that the downside is quite limited for now.
The Norges Bank gave a boost to the krone yesterday as it decided to leave its deposit rate unchanged at 0.50%. USD/NOK fell sharply to 8.08 before stabilising at around 8.12. With mounting inflationary pressure and an encouraging growth outlook, the risk is definitely skewed to the downside. A support can be found at 7.97 (low from May 3rd), while a resistance lies at around 8.40 (previous highs).
Yann Quelenn, market analyst: “Draghi warns banks and SNB’s Jordan to speak on Monday: This week has seen a pretty intense round of central bank decisions. Of course, the BoJ and the Fed were the main attractions, although in the end nothing really new has emerged except the rate target (to around zero) for 10-year government bonds.
Yesterday, ECB President Mario Draghi spoke at the European Systemic Risk Board in Frankfurt, where he stated that the banking sector is too crowded to be profitable. It is true that banks are in the eye of the storm. We continue to believe that Italian banks for example may trigger further banking disruption in the Eurozone. The recent stress test has revealed that the €360 billion of bad loans are a major threat for the stability of the European financial system.
Yesterday, the euro weakened against the Swiss franc on these comments. Thomas Jordan is set to speak on Monday in Geneva after the release of the sight deposit data. The SNB remains deeply under pressure and in our view, Swiss policymakers remain on the edge, but ready to act at any time. When looking at the situation in the US or Japan, it is difficult not to believe that the franc is set to remain strong for quite some time more. On the other hand, the Swiss economy is adjusting to a strong franc. Growth is expected to print for Q2 at 2% y/y versus 1.1% y/y for the first quarter, mostly driven by government spending and foreign trade. However, this situation is fragile as any evidence, or turmoil could potentially send the CHF higher. This is why we remain bearish on the EURCHF.”---
Equity returns were broadly mixed during the Asian session as traders were reluctant to load on risk ahead of the weekend. After a day off, Japanese equities opened lower with the Nikkei and Topix index falling 0.32% and 0.23% respectively. In mainland China, the mood was no better as both the Shanghai and Shenzhen Composites were off 0.19% and 0.38% respectively. Offshore, Hong Kong’s Hang Seng traded flat, while in Taiwan, the Taiex rose 0.53%. In Europe, equity futures are trading slightly lower with the Footsie down 0.14% and the Euro Stoxx 600 falling 0.14%.
Today, traders will be watching PMIS from France, Germany, the Eurozone and the US; PPI from Spain; retail sales and CPI from Canada.