No surprise from the FOMC minutes, USD recovers
The March 17-18 FOMC meeting minutes did not surprise us yesterday. With the dovish shift in Fed policy being already priced in, yesterday’s minutes gave no further clarity on the timing of the first Fed fund rate hike. Even if the hawkish camp (Mester, Lacker and Bullard) continued pushing for an early normalization (June), the fact that the minutes are dated before March payrolls may give a good reason to take a step back. However, one weak labour data release over thirteen will hardly reverse any member’s core view at the heart of the FOMC. At this point, we still believe the Fed will hike rates either in June or September. The pace of the normalization will most probably be half way slower than formerly thought, but this does not change the positive Fed divergence against a good number of its G10 peers. We keep our bullish USD bias verse EUR, JPY, SEK, AUD and CAD.
The traditional start of US quarterly earnings, shares fells after they beat on earnings but missed on expected revenue. The aluminium giant shrugged this off, highlighting restructuring costs and record performance in certain areas. Alcoa (NYSE:AA) trades lower at pre-market.
EUR-bears in charge
Following the Fed minutes, the market is back on buying USD against currencies that are subject to more easing potential. EUR is certainly a good short, yet the confirmation of Greece’s payment to the IMF should be of support throughout the day. For the rest of the week, the benign reaction to Greek payment clearly alters our view for potential short-term relief recovery in EUR/USD. The market remains strongly short EUR. Light vanilla calls should give support above 1.0700/50 at today’s expiry. Below this level, the EUR/USD bears is expected to gain momentum down to 1.0655 (technical target), then mid-March lows (1.0458)
The ECB purchases shorter term maturity bonds from the core and longer maturity bonds from the periphery. Whether this is an available liquidity issue or a simple risk diversification effort, the flattening of the EUR yield curve in Eurozone’s core (Germany, France, Netherlands) gives interesting opportunities on the back-end of the curve, which will most probably shift higher as the liquidity on the short-end dries up.
Sterling slides lower on wider trade deficit
As expected, the gains on UK equities remained short-lived after the Royal Dutch Shell (LONDON:RDSa) - BG Group (LONDON:BG) merger. The FTSE 100’s failure to clear resistance at 7000/7060 signals that the FTSE has certainly topped and is ready for a downside correction in line with the UK’s uncertain pre-election context. The GBP/USD slid to a week low in London amid the UK’s trade deficit widened significantly faster than expected in February (£ -2,859 verse £-1,500 expected, last month £ -616 revised up to £ -1,536). Today’s slide solidifies resistance pre-1.5020/55 and paves the way for further drop to 1.4620/35 zone (technical target/Mar 18 FOMC reaction low). Large vanilla puts trail below 1.4750 for today expiry and should add further weight on the sell side if activated.
The BoE verdict is expected to be a non-event today. The BoE’s pre-election silence will last for another month, and in the absence of BoE hawks in the market place, the Sterling complex should remain anchored on the downside.
In focus today: Japan Mar (P) Machine Tool Orders YoY, UK Feb Trade Balance, BoE Bank Rate and Asset Purchases Target and US Feb Wholesale Inventories MoM.