Idea of the Day
Interesting moves on the euro yesterday, which underline our view that you have to look beyond simple what the ECB is doing and saying and see what is happening to market interest rates. The 3M interest rate is at its highest for more than two years, despite the fact that the ECB has cut interest rates twice during that period. What is happening is that banks are repaying the excess of liquidity they have been holding, so less money sloshing around means upward pressure on interest rates. Comments from ECB official yesterday (Coeure) acknowledge that the ECB were on top of this and ready to act to counteract this rise. Once again, this means that low official rates and low inflation don’t necessarily make for a weak currency, a point we have made before with regards to the single currency.
Data/Event Risks
USD: Some data out which may impact the dollar, including industrial production, housing starts and Michigan sentiment later in the day. Some of the leading indicators are suggesting a softer start to 2014 and dollar could be vulnerable if data follows this path.
GBP: Retail sales data released and small rise of 0.3% MoM expected. This is key spending month and volatility risks on the data are greater because seasonal adjustments can never perfectly adjust for the huge surge in sales seen pre-Christmas. This does make sterling a little more vulnerable today.
Latest FX News
AUD: Steadier overnight after the post-employment data fall. AUDNZD has also seen a modest reversal, but still looking vulnerable to further losses towards 1.05.
GBP: A slightly weaker tone emerging on cable as the dollar has taken on a more assured footing during the month. There is decent chance that the Bank of England will adjust forward guidance next month, similar to that seen from both Fed and also ECB recently. This could knock sterling looking further out.
USD: The dollar is slowly finding its legs after a more uncertain start to the year. Indices continue to suggest that data continues to surprise to the upside, although yesterday was more mixed. Overall, Fed still likely to taper at the end of this month.
Further reading:
Canadian Dollar Losing its Lustre as the Commodity Super Cycle Wanes