forex weekly report

Dieter Merz,
Chief Investment Officer
FOREX
WEEKLY
REPORT
Luciano Jannelli, Ph.D.
Chief Economist
22 April - 28 April 2013
Luc Luyet, CIIA, CMT
Senior Analyst
MIG BANK
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DISCLAIMER & DISCLOSURES
FOREX WEEKLY REPORT
22 April - 28 April 2013
FOREX WEEKLY REPORT - An overview
MIG BANK
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p.3
Economics
Global slowdown concerns mount as stocks and gold correct
p.4
Economics
European Central Bank will soon be forced to act
p.5
FX Markets
No rates hike in sight for Canada
p.6
FX Markets
Monetary stimulus from Bank of England is getting nearer
p.7
FX Markets
Gold has lost some of its shine
p.8
FX Markets
Potential delayed US QE's exit favours EUR/USD
p.9
Disclaimer
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Page 2 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
Economics
Global slowdown concerns mount as stocks and gold correct
Philadelphia Fed Outlook and Conference Board Leading indicators
add to growing gloom
As payroll tax hikes continue to kick in, firms deplete existing inventories
and postpone hiring plans. After the deterioration of the outlook for the
New York area, the greater Philadelphia area followed a similar pattern.
Not surprisingly the Conference Board Leading indicator fell 0.1%, from a
plus 0.5% in the earlier month.
Gold and stocks indicate growing fear? Growth concerns probably
overdone
A reversal to recession fears is bad for stocks, and through the channels of
deflation and emerging markets, also for gold. Yet, contained spreads
and a resilient euro against the US dollar are still reminiscent of a
moderately risk-on environment. If one recognizes that post-Lehman US
trend growth is lower than pre-Lehman US trend growth, then a cooling of
activity was inevitable. Indeed, job creation in excess of an average of
200'000 units per month, observed from over the last two quarters, is
consistent with a 3% annual growth rate. Since the financial crisis, the
United States' economy has not been able to "escape" from a more
modest 2% annual growth rate. Yet, while also the housing markets is
showing a bit more signs of fatigue, it is too early to call an end of the US
real estate pickup (today's true engine of the US business cycle). Indeed,
housing data is necessarily volatile and, while new building permit
requests were down, housing construction starts were up.
MIG BANK
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Page 3 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
Economics
European Central Bank will soon be forced to act
Inflation remains no concern
It is true that in March headline inflation remained stable and that even
core inflation had a more than expected uptick (from 1.3% YoY to 1.5%
YoY, against 1.4% YoY). Yet, at 1.7% headline inflation remains well below
the 2% target. More importantly, with labor costs under continuing
pressure and oil prices receding, there are little upward pressures on the
horizon.
Weakness is extending beyond countries with financial
fragmentation problems
A conventional interest rate level is of little help in countries such as Spain
and Italy that suffer from the Euro-zone's financial fragmentation.
Financial fragmentation essentially means that the monetary transmission
mechanism does not work such that Spanish and Italian companies have
to pay high interest rates, in spite of the ECB's low reference rate. Yet, Mr.
Draghi has pointed out that weakness is now also extending to countries
that do not have these problems. The concern is that relatively large
economies, such as The Netherlands and France, also get trapped in
continuing recession. Thus, while Frankfurt is also studying "nonconventional" measures to break the specific consequences of financial
fragmentation, it looks likely to reduce its reference rate too.
Fed QE exit might be delayed
Since the sequester might create additional uncertainty through
November, we expect the Fed to stick to QE through most of the year.
This explains while the rebound of the US dollar might be postponed for
some while. We still believe it to occur sooner rather than later, as the
ECB will, in one way or another, engage expanding its monetary basis,
while the Fed will be the first major central bank to exit QE.
MIG BANK
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Page 4 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
FX Markets
No rates hike in sight for Canada
The tightening cycle is fading along Canada's growth outlook.
As widely expected, the Bank of Canada (BoC) left its target unchanged
for the overnight rate at 1%. The BoC kept a tightening bias by saying that
"some modest withdrawal will likely be required after a period of time".
But given the lower growth forecast, coupled with CPI inflation lower than
1% (the official target is 2%), it is very unlikely to see any rate hike in the
foreseeable future. Indeed, tightening would be intended to prevent
further household credit growth. However, the overall strong Canadian
dollar, which is hurting exports, and the weakening business cycle outlook
would rather call for rate cuts.
The weak growth outlook favours a stronger USD/CAD.
This gradual shift away from a tightening cycle to a prolonged period of
low interest rates (with potential rate cuts along the way) is also shifting
our bias towards the USD/CAD. Indeed, we do not see anymore many
factors calling for a stronger Canadian dollar versus the US dollar, except
an extreme reading in net short CAD positions. However, these indicators
are always secondary to price action and, currently, the USD/CAD is not
showing any bearish reversal pattern. Moreover, the IMF, which tends to
be quite successful in forecasting Canada's growth, warned that a
worsening European debt crisis, a fading U.S. recovery or a decline in the
global demand for commodities are all factors that could aggravate the
economic outlook. The recent economic developments in the U.S. and in
China do not bode well for Canada. Looking at the chart, medium to
long-term upside potential for USD/CAD are given by the resistances at
1.0447 (June 2012 peak) and 1.0870 (November 2011 peak).
MIG BANK
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Page 5 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
FX Markets
Monetary stimulus from Bank of England is getting nearer
Recent economic data suggest a less rosy phase of global cooling. On
Wednesday, the United Kingdom had its share of weak economic releases
by publishing a rise in unemployment and a modest increase in the
general regular pay (while inflation remains at 2.8% YoY).
It is true that an increase in the assets purchase programme of the Bank of
England would likely support higher inflation, but given the fiscal austerity
and the squeeze on consumers coming from high inflation and low wages,
the burden of supporting growth lies in the BoE's hands. However, we still
believe that any big change is unlikely to occur before Mr Carney's arrival
in July. Indeed, barring a dismal Q1 GDP figure (to be released on 25
April), the BoE should only consider an extension of the Funding for
Lending scheme during its next meeting on 9 May. Meanwhile, the
decline in oil prices and in other commodities should tame inflation in the
short-term.
From a technical point of view, the break to the downside of the large
multi-months horizontal range between 1.5232 and 1.6302 coupled with
the recent short-term rebound suggest that it could already be the time
to build short positions in the GBP/USD. Even though a longer rebound
could not ruled out, as the main BoE monetary stimulus should occur in
August, we continue to believe that the medium-term trend favour a
move towards the support at 1.4231 (May 2010 trough).
MIG BANK
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Page 6 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
FX Markets
Gold has lost some of its shine
Gold suffered its sharpest fall on 15 April since the 1980s, losing more
than 9% at the closing bell and breaking the long-term key support at
1523 that was holding since end of 2011.
Basically, gold demand can be divided in four categories: jewellery,
investment, technology and central bank net purchases. The demand
coming from technology and jewellery tends to remain fairly constant,
with the difference that technology's percentage of total demand is small
while the one from jewellery is large. On the other hand, demand from
central banks and investment is more volatile, with the latter having
increased regularly since 2011, along with the rise of gold, so as to reach
roughly the same size of jewellery demand. Therefore, the behaviour of
these last two categories is key to understand what lies ahead for gold.
Central banks have been net buyers since 2010. However, the decision of
the Cyprus National Bank to sell its gold as part of refinancing measures
could be followed by other central banks. Overall, we do not expect
central bank net purchase to have a positive impact on gold.
Investors, on the other hand, have invested in gold throughout the last
ten years as an inflationary hedge, a financial crisis hedge and because of
its stellar performance since the start of 2000. However, recent economic
data indicate that no inflation is in sight as the global recovery is still
struggling. Thus gold is becoming relatively less interesting as a safehaven asset, as the recent Cyprus crisis has shown. The resulting decline
in price is expected to have left scars among investors, so a pickup in
investment demand is unlikely in the next months, which favours further
decline towards at least 1290 USD. However, long-term investors and
jewellery demand are likely to put a floor in gold's decline and lead to a
new range for wide sideways moves.
MIG BANK
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Fax +41 58 721 90 01
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Page 7 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
FX Markets
Potential delayed US QE's exit favours EUR/USD
The International Monetary Market (IMM) non-commercial
positioning is used to visualise the flows of funds from one currency
to another. It is usually viewed as a contrarian indicator when it
reaches an extreme in positioning.
Euro short positions have been reduced, which has led to some Euro
strength. The recent weak economic data coming from the US,
suggesting that the Fed could delay its QE exit, coupled with a significant
short Euro positioning could lead to further short-term strength for the
Euro.
The British pound saw further increase in short positions. It is approaching
the extreme levels seen in September 2008 (-48.37%) and March 2010
(-54.82%). Even though this increases the risks of GBP rebounds, we
continue to believe that the weak growth, the fiscal tightening, the
change of the BoE's remit and the arrival of Mr Carney will lead to a more
aggressive BoE, which ultimately should weaken the British pound.
The short positions in the Japanese yen have not increased despite the
recent sharp JPY depreciation. It suggests that there are not only
speculative flows pushing the yen lower but also some structural flows.
We continue to believe that BoJ's bold measures will continue to put
pressure on the yen, leading to further depreciation.
The positioning in Australian dollar is still extremely long. Even though it
suggests that risks are more biased to the downside, we would more
focus on the price evolution or, in other words, a break of the horizontal
range between roughly 1.0150 and 1.0610 to give the direction of the next
medium-term trend.
MIG BANK
Tel +41 58 721 90 00
4, Avenue d'Ouchy
Fax +41 58 721 90 01
CH-1006 Lausanne
[email protected]
Switzerland
www.migbank.com
Page 8 | 9
FOREX WEEKLY REPORT
22 April - 28 April 2013
DISCLAIMER
No information published constitutes a solicitation or offer, or
recommendation, or advice, to buy or sell any investment instrument, to
effect any transactions, or to conclude any legal act of any kind
whatsoever.
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The information published and opinions expressed are provided by MIG
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accurate, complete or up to date. In particular, nothing contained
constitutes financial, legal, tax or other advice, nor should any investment
or any other decisions be made solely based on the content. You should
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decision.
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All opinion is based upon sources that MIG Bank believes to be reliable
but they have no guarantees that this is the case. Therefore, whilst every
effort is made to ensure that the content is accurate and complete, MIG
Bank makes no such claim.
MIG BANK
Tel +41 58 721 90 00
4, Avenue d'Ouchy
Fax +41 58 721 90 01
CH-1006 Lausanne
[email protected]
Switzerland
www.migbank.com
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