When Does The 1.3000 Magnet Release EUR/USD?

The market remained extremely rangebound as the 1.3000 magnet in EURUSD continued to exercise its pull ahead of the pivotal German IFO survey. AUD and CHF are looking weak and could continue to do so.

RBNZ
The RBNZ was out and stressed New Zealand’s strong economic performance and in particular, concerns on booming house prices more than concerns about the kiwi’s strength. While there was little reaction in interest rates, the market took this as relatively hawkish and bid up the kiwi, particularly against AUD, as there were negative developments Down Under (more on that below). AUDNZD poked to its lowest level since 2010 on the diverging developments.

Aussie fundamentals crumbling
Aussie is a bit weaker but would be sharply weaker if traders weren’t distracted by the gold price comeback and yesterday’s monster rally in world equity markets (both somewhat AUD supportive), but overnight we had two particularly AUD-bearish developments, including much lower than expected CPI data – also for the core “trimmed mean” data, and we also had the RBA’s Lowe out saying that the RBA would look to invest foreign currency reserves in China (only 5 per cent, but it’s still a new direction). 2-year Australia swaps have come in 10 bps over just the last two days to 2.89% and this is versus 3.25% in the late March time frame – a lot of wood to chop to the downside for AUD, particularly if the gold and risk asset rallies cool from here.

Strong EU periphery… for now
EU sovereign spreads came in very sharply yesterday as the market refuses to buy the EU systemic risk story and instead buys, among other ideas, the idea that Japanese funds will flow to the periphery of Europe to take advantage of those “fat yields” (Hussman’s comments about QE’s main effect being to make it “uncomfortable” to hold any low-yielding asset are particularly true of the BoJ’s new easing programme. So now we are supposed to see Japanese life insurers and other investors scared out of Japan’s low-yielding environment and into the EU PIIGS? Once can hardly imagine that a 4% yield on PIIGS debt means anything in the long run – when those peripheral countries must either undergo a devaluation or a default in the coming years. Pity the Japanese investor…overnight, yet another Japan life insurance company was out saying that it will be cautious about buying Japanese bonds). Peripheral spreads may also be coming in due to the anticipation of the Italian political situation clearing up as Napolitano was reappointed president.

Weak CHF
With the Euro systemic risk trade rapidly receding onto the horizon for the moment and risk appetite shooting out the lights, it’s no big surprise to see the CHF weakening and yesterday saw the biggest one-day rally in EUR/CHF since January. USD/CHF is perhaps the way to look for further CHF weakness, but that assumes that we can finally take out the 1.3000 level in EUR/USD for good here. GBP/CHF in another interesting one lately as it is poking at interesting resistance levels. This used to be a great currency pair to trade – perhaps it is “coming back” and will continue to do so the more EUR/CHF can diverge from the 1.2000 floor.

Chart: USD/CHF
USD/CHF pulled sharply higher yesterday. Note the move through both the 55-day and 200-day moving averages and also note the key overhead resistance that looks interesting if broken in coming days/weeks. A solid 1.3000 break in EUR/USD would be helpful for moving the pair higher. Support looks like 0.9400 with a break of 0.9500 (descending trendline) the first key confirmation that the pair is gearing up for a bigger rally.
USD/CHF" title="USD/CHF" width="455" height="298">
Looking ahead
For now, look for the market to react to the German IFO survey result and this endless tiresome 1.3000 level in EURSUD. Also look out for Napolitano out announcing his choice for prime minister, who will then be charged with trying to form a government. The market looks very complacent on this front, but I’ve no guidance there. A few ECB officials are out speaking later, with Weidmann the one to watch most closely.

US data today includes the Durable Goods Orders data for March.

Economic Data Highlights
New Zealand RBNZ left the Official Cash Rate unchanged at 2.50% as expected
Australia Q1 Consumer Prices rose +0.4% QoQ and +2.5% YoY vs. +0.7%/+2.8% expected, respectively and vs. +2.2% YoY in Q4
Australia Q1 CPI – Trimmed Mean out at +0.3% QoQ and +2.2% YoY vs. +0.5%/+2.4% expected, respectively and vs. +2.3% YoY in Q4

Upcoming Economic Calendar Highlights (all times GMT)
Germany Apr. IFO Survey (0800)
UK Mar. BBA Loans for House Purchase (0830)
US Mar. Durable Goods Orders (1230)
Euro Zone ECB’s Weidmann out Speaking (1315)
US Weekly DoE Crude Oil and Product Inventories (1430)