EUR: 3 Reasons For Further Upside Coming Months; Where To Target? – Credit Suisse

Credit Suisse FX Strategy Research makes the case for further EUR upsidein the coming months mainly on the ground of the following 3 reasons: 

1- CS take the  view that the French election does not result in a Le Pen victory, allowing for the risk premium still priced into 2m EURUSD implied volatility and risk reversals to be taken out, and for EUR to rally as a result.

2- CS argues that along with the current account support for EUR that is a persistent backdrop, the recent more hawkish ECB tilt, and the fact that global reserve manager allocations to EUR are still near historical lows, this leaves room for more EUR upside.

3- CS is also encouraged by the positive momentum in European equities this year even in the face of the currency’s recent recovery. 

In line with this view, CS now targets EUR/USD at 1.10 in 3-month and 1.12 in 12-month.

Source: Credit Suisse Global Fixed Income Research

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GBP: 'Uncertainty Has Only Just Begun'; Get Ready To Buy The Dip – BofA Merrill

Bank of America Merrill Lynch FX Strategy Research notes that the initial reaction to the triggering of A50 has been relatively muted.

In this regard, BofAML strongly disagrees with the argument that the formal triggering of A50 triggering has somehow removed uncertainty, arguing that with the clock now ticking on the 2-year deadline and the EU seemingly in little rush to sit around the negotiation table, this void of concrete negotiating principles does not sit well for GBP which continues to rely on capital inflows to finance its current account deficit.

As such, BofAMl continues to believe that GBP/USD is likely to trade back towards the bottom end and test the $1.20 trading range, but makes the case that this post A50 dip in GBP would providing a buying opportunity. 

“Whilst our bias remains for renewed GBP weakness at the higher end of the 1Q17 technical range, we are cognisant of the ongoing positioning unwind positive April seasonal factors which has seen GBP rally every month over the past twelve years and an unconfirmed technical base in GBP/USD,” BofAML adds. 

GBP/USD is trading circa 1.2530 as of writing. 

Source: Bank of America Merrill Lynch Rates and Currencies Research

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AUD: 4 Reasons For A Near-Term Correction – CIBC

CIBC World Markets Research argues that investors should be cautious on AUD as the currency looks likely heading towards a near-term correction on the ground of the following 4 reasons:

1- Aussie dollar is generally the most correlated major with global growth assumptions and sentiment and as such it remains vulnerable as long as the current risk-off tone persists.

2- Speculative long positions in AUD remain almost double the average of the past year, leaving room for an unwind to hit the currency.

3- Iron ore prices have reversed their recent gains, opening the door to further unwinding in long speculative currency positions.

4- The central bank also doesn’t appear to be in any rush to tighten policy, with spare labour market capacity and subdued wage pressures keeping the central bank on the sidelines until next year.

Add it all up, and it seems likely that the Aussie dollar could be in for a near-term correction. However, as sentiment improves, the currency should begin making back those losses and more, over the back half of the year,” CIBC concludes. 

AUD/USD is trading circa 0.7636 as of writing. 

Source: CIBC Economics – CIBC Capital Markets

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Forex Weekly Outlook April 3-7

Australian rate decision, US ISM Manufacturing PMI, ISM Non-Manufacturing PMI, Crude Oil Inventories, FOMC Meeting Minutes, Employment data from Canada and the US including the important non-Farm Payrolls on Friday. These are the top events on forex calendar. Join us as we explore the market-movers of this week.

Last week US Gross domestic product[1] for the final quarter of 2016 was revised up to an annualized pace of 2.1% from 1.9% in the previous estimate, as consumer spending edged up to 3.5%. The data demonstrates the important contribution of consumer spending to US growth as the employment market continues to tighten. Economists expect first-quarter growth of 1.9%, while the Trump administration talks about a 3% pace or more. Will we see a further climb in the first quarter?

Let’s start,

  1. US ISM Manufacturing PMI: Monday, 15:00. ISM manufacturing PMI exceeded expectations in February hitting 57.7. This was the highest reading since December 2014, indicating solid growth in the manufacturing sector. Analysts expected a climb to 56.2. Despite the fact that the ISM and the manufacturing PMI figures did not coincide, the general trend shows the manufacturing sector is robust. Manufacturing PMI is expected to decline to 57.2 in March.
  2. Australian rate decision: Tuesday, 5:30. The Reserve Bank maintained the official cash rate at 1.5% in March, keeping the rate unchanged for the sixth meeting in a row. Reserve Bank governor Philip Lowe often spoke about keeping rates on hold to balance the need to boost inflation while maintaining financial stability amid record household debt. Policymakers are following international interest rate movements before making a move.
  3. US ADP Non-Farm Employment Change: Wednesday, 13:15. According to the ADP report companies added a hefty jobs gain of 298,000 in February, shifting away from the service-sector to goods producers. Economists expected an increase of 184,000. These results preceded the Non-Farm Payrolls report, with the healthy 235,000 gain, paving the way for the Fed’s recent rate hike. ADP report is expected to show a 191,000 jobs gain in March.
  4. US ISM Non-Manufacturing PMI: Wednesday, 15:00. US service sector expanded in February, climbing to 57.6 from 56.5 in January. Economists expected the index to remain unchanged. The majority of responders were positive about business conditions and the overall economy. The business activity index increased to 63.6 in February from 60.3 in January, reaching its highest reaching since February of 2011. The new orders index edged up 61.2 in February from 58.6 in January and the employment index climbed up to 55.2 in February from 54.7 in January. Non-Manufacturing PMI is expected to reach 57.1 this time.
  5. US Crude Oil Inventories: Wednesday, 15:30. U.S. crude stocks increased by 867,000 barrels in the week ending March 24, however refineries increased output, causing gasoline stocks and distillate inventories to decline. Analysts expected a higher reading of 1.4 million barrels. Gasoline stocks declined by 3.7 million barrels, U.S. crude imports fell 543,000 barrels per day.
  6. US FOMC Meeting Minutes: Wednesday, 19:00. Minutes from the Fed’s rate hike meeting in March will be released in April, providing an in-depth account on the reasons behind the 0.25 percentage point rate rise. Yellen said, in the press conference following the meeting that the economy is doing well and that policymakers are confident in the robustness of the economy. The minutes will also include the Fed’s outlook regarding further rate hikes this year.
  7. US Unemployment Claims: Thursday, 13:30.  The number of Americans filing new claims for unemployment benefits declined by 3,000 for the week ended March 25, suggesting some loss of momentum in the robust labor market. The 258,000 new claims registered were higher than the expected 240,000 increase but the number of claims remained below the 300,000 level associated with a healthy labor market. The labor market is currently near full employment. The four-week moving average of claims increased 7,750 to 254,250. Jobless claims is expected to reach 251,000 this week.
  8. Canadian employment data: Friday, 13:30. Canada’s economy created 15,000 jobs in February, pushing the unemployment rate to a near ten-year low of 6.6%. A healthy gain of 105,000 full time positions offset a 90,000 decline of part-time jobs. The reading was far better than the 600 jobs gain forecasted by analysts. This positive data joins an upbeat trend in the Canadian economy suggesting the Canadian economy has turned the corner. Economists expect Canadian job creation of 5,700 and a rise to 6.7% in the unemployment rate.
  9. US Non-Farm Employment Change and Unemployment rate: Friday, 13:30. U.S. Nonfarm payrolls release showed a job creation of 235,000 positions in February, beating expectations. Wages also increased providing assurance that the US economy is ready for another rate increase. The construction sector recorded its largest gain in nearly 10 years. Analysts expected a job creation of 196,000 in February. Wages continued to increase rising 0.2% as in January. The unemployment rate fell one-tenth of a percentage point to 4.7% despite higher participation rate in the employment market. US jobs report for March is expected to show a job gain of 176,000 while the unemployment rate is expected to remain unchanged at 4.7%.

That’s it for the major events this week. Stay tuned for coverage on specific currencies

*All times are GMT.

Further reading:

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EUR: Nor Ready For A Breakout Yet; What's The Trade? – TD

TD Research comments on the latest EZ inflation data noticing that while the March print missed expectations rising 1.5% oya from 2.0% prior, the data showed some temporary effects related to Easter that could see the data perk up over the coming months.

Still, TD argues that the base effects are fading from some of the headline price indicators, suggesting some pullback in the convergence trade near-term.

The takeaway, according to TD, is that the EUR is not ready for a break of 1.10 with the ECB likely holding steady until June, and with EUR risk premium looks too low ahead of the first round of the French elections. 

“EURUSD is testing the 50% retracement level of the 60-day range and break below opens up a move to 1.05. We like buying EURUSD dips there but near-term prefer short EURGBP exposure into the April risk events and would fade the rallies on upside breaks of 0.86,” TD advises. 

EUR/USD is trdaing circa 1.0647 and EUR/GBP circa 0.8564. 

Source: TD Securities Research

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GBP/USD: Triangle Support; AUD/NZD: Neckline Of Inverse H&S – SocGen

Societe Generale FX Technical Strategy Research notes that GBP/USD tested the intermittent projection at 1.1752/1.1660 last October, and it has evolved within a triangle since which suggesting that the pair’s ongoing phase of consolidation is similar to the temporary pauses seen during last February-May and July-September. 

On a shorter time-frame, SocGen notes that the pair has recently rebounded towards the upper bound of the triangle which is currently at 1.2610 and has started to retrace.

“A move towards the triangle support near 1.2155/1.21 looks likely, with the next support at 1.20/1.1918,” SocGen adds. 

 On AUD/NZD, SocGen notes that signs of stabilization have emerged amid forming a bullish large inverse head and shoulders.

Adding to this bullish structure, according to SocGen, is 1- the monthly RSI which has broken beyond a multi-year channel and 2- the break above the descending channel confirming a smaller inverse H&S.

“This suggests a move towards the neckline of the larger formation near 1.1440/60, with intermittent targets at 1.1060 and 1.12,” SocGen argues. 

GBP/USD is trading circa 1.2468 and AUD/NZD is trading circa 1.0937 as of writing 

Source: Societe Generale Cross Asset Research

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EUR: How The Sequence Of ECB Normalization Would Impact EUR? – Nomura

Nomura FX Strategy Research notes that absent French election shocks, ECB policy normalization should be insight.

This, according to Nomura, would be EUR positive, but the impact on EUR crosses may depend on the sequence of normalization 

“In G10 FX space, if the ECB tapers and the EUR curve bear steepens, JPY would be the clear underperformer, while an early rate hike would weaken USD, GBP and CAD more. The reaction of European G10 FX will likely be more muted under both scenarios,” Nomura concludes. 

Source: Nomura Securities Research

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Preview: US: Personal Income, Spending, Core PCE Price Index

Preview: US: Personal Income, Spending, Core PCE Price Index

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Preview: US: Personal Income, Spending, Core PCE Price Index

Preview: US: Personal Income, Spending, Core PCE Price Index

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Euro-zone inflation badly disappoints – EUR/USD still holding onto support

After a few months of rapid rises, the headline consumer price index dropped in the euro-zone to 1.5% in March. This is a significant fall of 0.5% from 2% in February. Expectations stood at 1.8%, but were probably downgraded after the miss on German and Spanish inflation numbers.

Worse off, core inflation is down all the way to 0.7%. The measure that excludes energy and other volatile items is at the lowest level in about a year. The y/y figure stood at 0.9% in the past few months after sticking stubbornly at 0.8% for a longer period of time.

So for now, there are no “secondary effects” to the rising prices of energy. It is important to remember that euro-zone unemployment is still elevated despite some falls. In addition, the advance in oil prices came from extremely low levels and at around $50 per barrel, we are still at half the price seen in 2014.

For the ECB, this means that the extension of the QE program is fully justified. They will continue buying bonds until the end of the year. However, the level will be reduced to 60 billion in April.

It seems that tapering the QE program has become less urgent. An extension into 2018 is not off the cards.

EUR/USD remains in the lower range, but holds onto support, above 1.0660. Resistance awaits at 1.0710. Will it break lower? Perhaps after the week, month and quarter reach their final end. Some last minute adjustment could be in play.

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