WHAT ARE THE CHANCES Risk Insight Volume 6, Issue 12-30 March 2015..that EURUSD will touch 1.15 within the next month? 11.0% The Big Picture Is the euro primed for another leg lower? fter reaching a 12 year low at A 1.0458 earlier this month, EUR/ USD bounced back to test briefly above 1.10 last week, alleviating some of the downward pressure in the short term at least. However, having failed to sustain a move beyond 1.10, traders will be sat looking at their charts this morning, questioning whether this is the start of a sustainable recovery, or whether it s merely a correction CHART 1: EUR/USD 1 Year within the longer term downward trend that began almost a year ago. In our opinion, it s the latter that continues to look the most likely scenario. Greece n recent weeks, the debate surrounding a possible Greek exit I from the Eurozone has quietened...that GBPUSD will be above 1.70 in one years time? 5.9%..that USDCAD will be touch 1.30 in the next 3 months? 60.4% *The above probabilities have been calculated using market data derived from the currency options market and interest futures market. This does not necessarily reflect the directional view of Validus Risk Management. Source: Bloomberg Validus Risk Management Ltd (FRN: 555972 is authorised and regulated by the FCA) www.validusrm.com
That s not to say that it isn t ongoing, but rather that it is no longer the topic grabbing the headlines. Instead, the ECB s latest stimulus efforts and questions arising over the Fed s stance on monetary policy have been hot topic and the main focal point for markets. Nevertheless, with the ECB likely to persist with its Public Sector Purchase Programme (PSPP) in the months ahead and the next Fed meeting not scheduled until the end of April, there is plenty of scope for the battle between Greece and the Troika (European Commission, European Central Bank and the International Monetary Fund) to take centre stage once again. As we head into April, the Greek Government has three repayments due to creditors ( 460m to the IMF on 8 th April, followed by payments of 1.4bn and 1bn to holders of short term treasury bills on 13 th April and 16 th April respectively) alongside its usual salary and pension obligations. While the likelihood is that the Government will scrape by this time around, the outcome of the next meeting of EU finance ministers in mid- April will be a key to determining whether or not Greece is forced into default in May when a further 2.4bn in payments falls due. Therefore, the current standoff between the Syriza led government and the Troika remains key. Greece s proposals for a revised bailout programme don t have enough detail to satisfy its international creditors and until something is agreed, officials are highly unlikely to release any further funds. Senior Eurozone ministers are scheduled to have a conference call on Wednesday this week to discuss the situation, but any hope of a resolution is thought to be highly unlikely ahead of the mid-april meeting, during which time we can expect the Brinkmanship to continue. To highlight the growing risk of default, ratings agency Fitch downgraded Greek debt late on Friday to a substantial credit risk citing uncertain prospects of timely disbursement from official institutions. Impact on markets reek stocks are down 1.2% this morning G while the yield on the three year Greek Government bond has risen 17 basis points to 20.73%. EUR/USD has been relatively stable be- CHART 2: EUR/USD Forecasts polled by Bloomberg Source: Bloomberg 2 www.validusrm.com
tween 1.0850 and 1.0900 while GBP/EUR continues to hover just below 1.3700. The latest CFTC data shows hedge funds and other speculators pushed net bearish positions on the euro to a record high in the week to 24 th March (net short contracts rose from 193,774 in the previous week to 220,963) highlighting that overall sentiment remains particularly bearish on the euro. Regular readers will be all too well aware that we see this as a contrarian indicator over the medium-long term, but in the short term, there is no ignoring the fact that momentum remains bearish. Forecasts or now, our 3, 6 and 12 month EUR/USD forecasts remain unchanged at 0.98, 1.03 and F 1.15 respectively. This compares to a slightly less bearish median forecast for contributors polled by Bloomberg of 1.06 in 3 months, 1.06 in 6 months and 1.05 in 12 months time (see chart 2 for more detail). Author: Marc Cogliatti 3 www.validusrm.com
GBPUSD A relatively volatile week last week showed the pair bouncing to and from the 1.4810 floor and the 1.4930 ceiling. Economic data releases this week were disappointing on both country s accounts, and the pair ended the week trading just marginally lower than at the week s opening, despite the activity throughout the week. Key Influences Support Resistance Level 1 1.4750 1.5025 Level 2 1.4500 1.5135 Technical View 1 2 3 Last week s activity for the pair was a relatively volatile account. The pair failed to reach the resistance level of 1.5025 but instead found a ceiling at 1.4994. A sustained break below 1.4650 will point to further downside risks. UK inflation slightly weaker than expected As Brent crude is struggling to break through $/barrel 60 the downward pressure on inflation continues. Last week s annual CPI for February has shown a further fall to 0.0% from 0.3% (versus expectations of 0.1%). Similarly, RPI and PPI were weaker than expected. As the UK stands on the edge of deflation, the pressure for the BoE to raise rates continues to fade in the background. US economic growth loses pace for Q4 The US GDP data released by the Commerce Department on Friday shows weaker than hoped for economic growth. The market had expected a 2.4% rate gain in the annual GDP, however this forecast was realised to be optimistic with the figures coming in just short of this at 2.2%. The weak US growth data now turns the focus onto the Fed s decision of when to raise interest rates, with the expectation that the weak data will encourage the Fed to delay the rate rise until later this year. Short-term Risk Factors UK Q4 GDP (Tuesday) Tomorrow s release of the UK GDP figure will provide some further indication as to what impact did the boost in consumer spending have on growth. The quarterly indicator is expected to remain stagnant at 0.5%, as well as the annual figure that projected to remain flat at 2.7. US Non-farm Payrolls (Friday) Recent economic data has indicated a slowing in the US economy. After non-farm payrolls steadily increased over the past six months, the focus is now on this month s data release to act as an indicator as to whether the recent slump in the US economy is likely to persevere. 4 www.validusrm.com
GBPEUR Support Level 2 1.3500 1.4285 ast week the currency GBPUSD fell to a 1 month low. Struggling to get through the 1.3550 level, GBPEUR L has bounced back higher towards 1.3650. The euro strength can be partially attributed to the better than expected key Eurozone s economic indicators that continued to positively surprise the markets throughout the last week. Key Influences UK inflation slightly weaker than expected As Brent crude is struggling to break through $/barrel 60 the downward pressure on inflation continues. Last week s annual CPI for February has shown a further fall to 0.0% from 0.3% (versus expectations of 0.1%). Similarly, RPI and PPI were weaker than expected. As the UK stands on the edge of deflation, the pressure for the BoE to raise rates continues to fade in the background. Resistance Level 1 1.3630 1.4000 Technical View 1 After falling off a multi-year high of 1.4250 all the way down to 1.3550, GBPEUR has sustained a tight trading range between 1.36-1.37. 2 Given the magnitude of the move higher since the start of the year, a deeper correction looks entirely possible without damaging the broader upward trend. 3 The next level of support comes in around 1.3500 with dips likely to find additional buying interest around 1.3425. Eurozone s Markit surveys better than expected and consumer confidence at post-crisis high There is a strong bullish sentiment after the ECB monetary policy action. Eurozone s Markit surveys have shown better than expected results across all three categories (manufacturing, services and composite). In addition, Tuesday s consumer confidence has shown the best results since 2007, with a final figure at -3.7 climbing up from the previous -6.7 (expectations of -6.0). Should this trend continue over the mid-term, there a potential argument for the euro bullish case, when ECB could potentially scale back its stimulus programme. Short-term Risk Factors UK Q4 GDP (Tuesday) Tomorrow s release of the UK GDP figure will provide some further indication as to what impact did the boost in consumer spending have on growth. The quarterly indicator is expected to remain stagnant at 0.5%, as well as the annual figure that projected to remain flat at 2.7%. Eurozone s unemployment rate (Tuesday) Tuesday s release of unemployment figure for February will reveal whether the recent downward trend is set to continue after the announcement of QE. The figure is expected to remain unchanged at 11.2%, however following the better than expected performance of Eurozone s data over the past weeks it would be interesting to see whether this tendency will continue. 5 www.validusrm.com
EURUSD Level 2 1.0460 1.1250 ast week the volatility in the EURUSD spot price has slightly decreased in comparison to the previous L weeks and stabilised at the trading range 1.08-1.10. Overall, the disappointing US GDP figures and the better than expected Eurozone s figures have been adding to the appreciation of the currency pair. Key Influences Support Resistance Level 1 1.0600 1.1050 Technical View The currency pair continued to trade steadily higher, throughout last week but struggled to break 1 through 1.10. A sustained break through 1.10 would further help ease downward pressure on the euro, but overall, 2 3 the likelihood is that further rallies will continue to encounter heavy resistance. On the downside, there is little in the way of meaningful support levels until 1.0570 and the recent lows at 1.0460. Eurozone s Markit surveys better than expected and consumer confidence at post-crisis high There is a strong bullish sentiment after the ECB monetary policy action. Eurozone s Markit surveys have shown better than expected results across all three categories (manufacturing, services and composite). In addition, Tuesday s consumer confidence has shown the best results since 2007, with a final figure at -3.7 climbing up from the previous -6.7 (expectations of -6.0). Should this trend continue over the mid-term, there a potential argument for the euro bullish case, when ECB could potentially scale back its stimulus programme. US economic growth loses pace for Q4 The US GDP data released by the Commerce Department on Friday shows weaker than hoped for economic growth. The market had expected a 2.4% rate gain in the annual GDP, however this forecast was realised to be optimistic with the figures coming in just short of this at 2.2%. The weak US growth data now turns the focus onto the Fed s decision of when to raise interest rates, with the expectation that the weak data will encourage the Fed to delay the rate rise until later this year. Short-term Risk Factors Eurozone s unemployment rate (Tuesday) Tuesday s release of unemployment figure for February will reveal whether the recent downward trend is set to continue after the announcement of QE. The figure is expected to remain unchanged at 11.2%, however following the better than expected performance of Eurozone s data over the past weeks it would be interesting to see whether this tendency will continue. US Non-farm Payrolls (Friday) Recent economic data has indicated a slowing in the US economy. After non-farm payrolls steadily increased over the past six months, the focus is now on this month s data release to act as an indicator as to whether the recent slump in the US economy is likely to persevere. 6 www.validusrm.com
USDCAD fter last week s stronger performance from the US dollar, the Canadian dollar has made a marginal A comeback. The rally in global oil prices this week following the Saudi Arabian air strikes have generated a sense of fear that these powerful participants in the oil market will have a disruptive effect on the global supplies, thus pushing oil prices higher which in turn benefited the CAD. Key Influences US economic growth loses pace for Q4 The US GDP data released by the Commerce Department on Friday shows weaker than hoped for economic growth. The market had expected a 2.4% rate gain in the annual GDP, however this forecast was realised to be optimistic with the figures coming in just short of this at 2.2%. The weak US growth data now turns the focus onto the Fed s decision of when to raise interest rates, with the expectation that the weak data will encourage the Fed to delay the rate rise until later this year. Support Canada focuses on oil With little in the way of Canadian data releases this week the focus has turned to oil prices. With the strong correlation that lies between oil prices and the Canadian dollar, as a result of heavy reliance the Canadian economy has their oil exports, oil prices remain a key influence in the CAD. This past week has proven fairly volatile, with oil futures rising dramatically following the news on Saudi Arabian air strikes in Yemen. With Saudi Arabia contributing 16% of the world s oil reserves, any concerns over disruption to these supplies will greatly impact the market, and the fears are of the hostilities here escalating that could ultimately send prices soaring. Short-term Risk Factors Resistance Level 1 1.2410 1.2825 Level 2 1.2350 1.3000 Technical View 1 2 3 After recently testing the 1.2825 level the pair failed to break through to higher grounds this week. The dollar was found to further weaken against the CAD to trade at a low of 1.2410 on Thursday. A move breaking through the 1.2350 level will point to further downside risks. Canadian GDP Figures (Tuesday) Canadian gross domestic product figures this week are expected to fall 0.2% from December to January. If the figures are realised to indeed fall into this negative territory, as they are expected to be, the Canadian Dollar will be at risk of a further weakening. US Non-farm Payrolls (Friday) Recent economic data has indicated a slowing in the US economy. After non-farm payrolls steadily increased over the past six months, the focus is now on this month s data release to act as an indicator as to whether the recent slump in the US economy is likely to persevere. 7 www.validusrm.com
FX Forecasts $ / / 3M 6M 1Y GBPUSD Validus 1.45 1.40 1.40 Bloomberg 1.47 1.47 1.47 GBPEUR Validus 1.48 1.36 1.22 Bloomberg 1.41 1.39 1.39 EURUSD Validus 0.98 1.03 1.15 Bloomberg 1.05 1.06 1.06 USDCAD Validus 1.28 1.30 1.32 Bloomberg 1.28 1.28 1.28 8 www.validusrm.com
Economic Data & Market Indicators Economic Matrix GDP CPI Unemployment Industrial Production Retail Sales Current Account % GDP Budget Balance % GDP 10 Year Yield US 2.20% 0.00% 5.50% 3.47% 1.7% -2.32% -2.80% 1.952% EUR 0.90% -0.30% 11.20% 1.20% 3.7% 2.30% -2.60% 0.194% UK 2.70% 0.00% 5.70% 1.30% -0.70% -5.55% -5.34% 1.565% CAN 2.44% 1.00% 6.80% 0.78% 1.20% -2.20% -0.26% 1.381% Sentiment & Positioning Currency (vs. USD) Speculative Positioning 3 Month Trend Risk Reversals (1 Month, 25d) 3 Month Trend Momentum EUR -0.22M Lower -1.5725 (EUR Negative) Lower Bearish UK -39K Lower -1.4025 (GBP Negative) Neutral Neutral CAD -33K Lower 1.0550 (CAD Negative) Neutral Neutral Country Current Rate Last Change Date of Change Next Meeting UK 0.50% -0.50% 5 th March 09 9 th April 15 US 0.00-0.25% -0.75% 16 th December 09 29 th April 15 CAN 1.00% +0.25% 21 st January 15 15 th April 15 EUR 0.05% -0.10% 4 th September 14 15 th April 15 9 www.validusrm.com
Weekly Economic Calendar Date Location Time Indicator For Previous Forecast 30/03/15 UK 9:30 Mortgage Approvals Feb 60.8k 61.8k EZ 10:00 Industrial Confidence Mar -4.7-2.9 EZ 10:00 Consumer Confidence Mar -3.7-3.7 EZ 10:00 Economic Confidence Mar 102.1 103.9 EZ 10:00 Services Confidence Mar 4.5 6.0 CA 13:30 Raw Material Price Index (m/m) Feb -7.7% 6.1% 31/03/15 UK 00:05 GfK Consumer Confidence Mar 1 2 UK 09:30 GDP (q/q) 4Q 0.5% 0.5% UK 09:30 GDP (y/y) 4Q 2.7% 2.7% EZ 10:00 Unemployment Rate Feb 11.2% 11.2% EZ 10:00 CPI Estmate (y/y) Mar -0.3% -0.1% US 14:45 Chicago Purchasing Manager Mar 45.8 51.8 01/04/15 US 14:45 Markit US Manufacturing PMI Mar 55.3 55.3 US 15:00 ISM Manufacturing Mar 52.9 52.5 02/04/15 US 13:30 Initial Jobless Claims Mar 282k 285k US 13:30 Continuing Claims Mar 2416k 2405k 03/04/15 US 13:30 Change in Nonfarm Payrolls Mar 295k 248k US 13:30 Unemployment Rate Mar 5.5% 5.5% Note: Figures in red have already been released. 10 www.validusrm.com