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  • #2
    EUR To End The Year Below Parity But Don't Sell It Outright.

    Bank of America Merrill Lynch:

    Themes: ECB trying to get ahead of the curve again: Following the market disappointment from the December meeting and even lower inflation data, the ECB almost pre-committed in the January meeting for more policy easing, most likely in March. This is consistent with our view that the ECB will be forced to do more this year and, if anything, it is happening even sooner than we had expected. However, the market does not seem impressed. A 10bp deposit rate cut was already priced in for this year. Following the December disappointment, investors seem skeptical whether the ECB could really overwhelm with decisive further action. The Euro, as a funding currency, is finding support in the risk-off market environment so far this year. And the market has also priced less Fed hikes after weak manufacturing data in the US.

    Positioning in the vol space may have also kept EUR/USD within a range after the ECB. We remain bearish EUR, but expect the path to remain choppy. If anything, the price action so far this year validates our strategy of selling EUR rallies, rather than being short EUR. More ECB easing and Fed rate hikes should eventually drive the Euro down, but a gradual ECB approach and a cautious Fed in response to mixed data suggest that EUR/USD may not weaken substantially yet and that the path will not be smooth.

    Forecasts: EUR to end the year below parity: We continue to expect EUR/USD to end the year at 0.95. This projection is consistent with our adjusted equilibrium estimate based on the large difference between the output gaps of the Eurozone and the US. Our projection also assumes more ECB easing and three Fed hikes this year. We have only marked to market our Q1 projection, to 1.05 from parity, taking into account the price action so far this year.

    Risks: mostly to the upside Despite expecting more ECB easing, the risks to our EUR projections are tilted to the upside. If the global market sell-off intensifies, or US data outside the labor market does not improve, the Fed may stay on hold for most of the year. The strong USD seems to be affecting US manufacturing data, which could force a Fed reaction. Moreover, investors are currently focusing on the risk sell-off and the collapse in commodity prices, which puts the theme of diverging monetary policies on hold for now.


    • #3


      • #4
        I think no Brexit fwiw


        • #5
          Originally posted by Potter View Post
          I think no Brexit fwiw
          Yeah I agree. I think Cameron made it part of his electoral pledge to offer a referendum so he basically now has to, to save huge embarrassment. On the other hand the timing is important if there is a high influx of refugees, or another terrorist attack maybe would tilt the balance in the other direction?

          We know for certain that volatility is coming for the GBP. The GBP relies heavily on the flow of money into the UK made by investment. Investors crave a stable political environment, and any uncertainty over the UK's future EU membership will have a negative reaction.

          In essence there would maybe a binary section in the GBP. A vote to stay in the EU could be GBP positive. A vote to leave could be GBP negative.


          • #6
            USD Bulls Are Running!
            The crowed USD long positions are getting a good squeeze today.
            FED'sDudley making the following comment: Continued financial tightening would weigh on FOMC. In other words we see what's happening in markets and we won't hike again until we're fairly sure there's nothing happening in the global economy that will hurt the US. Not surprising comments really due to his dovish stance.

            Here is an article recently posted on Bloomberg some of you may find a good read.


            • #7
              Hi guys!

              More news on the USD move today over on Reuters.


              • #9
                Coming up in the London session:

                BOE Monetary Policy Summary, Meeting Minutes, Bank Rate Votes, and Inflation Report.

                Expected: 1-0-8
                Previous: 1-0-8


                As of August 2015, the BOE release their Monetary Policy Committee Meeting Minutes and their Official Bank Rate decision at the same time. The minutes contain the interest rate and asset purchase vote for each of the nine MPC members during the most recent meeting. The breakdown of votes provides insight into which members are changing their stance and how close the committee is to enacting a change in monetary policy. This vote is reported in an X-X-X format; the first number is MPC members who want to raise rates, second to cut rates, third to keep on hold. The BOE release the MPC Rate Statement only when they have changed the OBR, therefore there will usually be no MPC Rate Statement released.

                The BOE now also release a Monetary Policy Summary which contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes.

                On a quarterly basis the BOE also release their Quarterly Inflation Report alongside the aforementioned releases. The QIR includes the BOE's projection for inflation and economic growth over the next 2 years. The BOE Governor also holds a press conference to discuss the report's contents after release. The QIR provides valuable insight into the bank's view of economic conditions and inflation; these are the key factors that will shape the future of monetary policy and influence their interest rate decisions.

                Summary:Expected Market Reaction:

                There is no expected change in regards to interest rates, so the initial reaction will come from any surprises in the vote count. If Ian McCafferty reverses his vote for a rate hike, changing the tally back to nine-nil will see the GBP pressured. This will be the first thing to watch for as some analysts have speculated that McCafferty may choose to change his stance at this meeting. We don't see a reason for that to happen at this particular meeting considering the recent better-than-expected CPI and Employment data, however, since we are not privy to all the information presented in the meeting, including the most recent OIR, we cannot rule it out.

                The addition of the Quarterly Inflation Report makes this event more volatile, and the contents of that report, along with the Monetary Policy Summary will dictate the direction of the GBP.

                Finally, the press conference 45 minutes after the initial releases will also likely add to the GBP volatility as we will hear directly for the BOE's Governor Carney.


                • #10
                  Here is a piece from Greg Michalowski on the EURUSD technical levels and NFP tomorrow.

                  "The EURUSD is inching higher....rebounding after correcting toward the 50% of the days range.
                  Coming into the NY session the price was still racing higher, but the pair did run into sellers and the price fell into the London fixing. In fact the low was made in the 5 minute bar that took the clock to 4 PM London time. The 50% of the days range comes in at 1.1153. The low came in at 1.1157.

                  Since then, the price has rebounded and just traded up to 1.1222. The high for the day came in at 1.1238. The 100 bar MA is up to 1.1195. A move below will shift some of the bias to the downside for traders. The price fell below the 100 bar MA into the London fixing but failed. Subsequently the price tested the level and held. Looking at the 100 bar MA, traders seemed to have used the MA as a level to lean against - both when above it and also when it broke below it. Look for the same into the Asia-Pacific session.

                  The market will also start to focus on employment report tomorrow. The move higher this week was likely helped - a little at least - by short covering. Have the shorts been squeezed out before the NFP tomorrow? I would guess, there is still plenty who have the downside as the preferred path.

                  Nevertheless, the market trades more two way in the New York session, but the buyers still seem to be more in control."

                  I should imagine that if most shorts have been squeezed out by NFP, with a good NFP number traders will reload their shorts and we will see a reversal to the short side.

                  At the moment no banks have changed their forecast in the eurusd, and nothing has really changed. The mean average eurusd forecast for March is 1.062. If you think about it what a fantastic price we have now to sell back into, once things settle down everyone will jump back in and realise what a bargain price we have now to shot from.

                  The FED haven't come out and said they are not going to hike, so the eurusd short trade is still there.


                  • #11
                    Here is a preview of the upcoming US Employment data at 13:30 GMT.

                    Bureau of Labor Statistics



                    Non-Farm Employment Change
                    Prior: 292K
                    Expected: 190K
                    Low: 110K
                    High: 256K

                    Unemployment Rate
                    Prior: 5.0%
                    Expected: 5.0%
                    Low: 4.8%
                    High: 5.1%

                    Average Hourly Earnings
                    Prior: 0.0%
                    Expected: 0.3%
                    Low: 0.0%
                    High: 0.5%

                    This data release shows three key employment metrics: Non-Farm Employment Change, also known as Non-Farm Payrolls, measures the change in the number of employed people during the previous month, excluding the farming industry. This is vital economic data released shortly after the month ends. The combination of importance and earliness makes for hefty market impacts. Job creation is a leading indicator of consumer spending which accounts for a majority of overall economic activity. The Unemployment Rate measures the percentage of the total work force that is unemployed and actively seeking employment during the previous month. Although it's generally viewed as a lagging indicator, the number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labour-market conditions. Unemployment is also a major consideration for those steering the country's monetary policy. Average Hourly Earnings measures the change in the price businesses pay for labour, excluding the farming industry. This is a leading indicator of consumer inflation because when businesses pay more for labor the higher costs are usually passed on to the consumer.

                    With the Fed deciding to hike rates in December the market's attention is now focused on the path of rate hikes. The Fed 'dots' released at the December meeting, indicated that most officials were expecting a total of 4 rate hikes in 2016, however the market remains unconvinced, and expectations have continued to fall. Current pricing now suggesting that investors believe the Fed will not be able to hike rates at all this year. As rate hike predictions drop for 2016, so has the greenback as the market reprices those expectations.

                    The recent increase in uncertainty means economic data is going to be even more important in regards to the path of rate hikes for the FOMC and the markets' expectations.

                    Payrolls are expected to rise 190K for January, which would be a solid reading even if well below the outsized gain of 292K in December. Jobless claims moved higher in January, which suggests less strength for the employment report, however the unemployment rate is expected to hold at a very low 5%. Wage readings in this report have been soft coming in flat for December, but are expected pick up a bit with consensus calling for a 0.3% gain.

                    This week's ADP report beat expectations printing at 205K which is a positive sign for the government release.

                    Expected Market Reaction:
                    This release always has the capacity to cause massive volatility in financial markets. Given there are three separate and important metrics, there can be moves in both directions if one figure comes out better while another figure worse. We will be looking for matching deviations across all three metrics in order to prompt a trade on the USD. If there are positive deviations on all three then we will look to buy the USD and if there are negative deviations across all three then we will look to sell USD. With the recent pressure on the USD, the risk is to the downside as poor readings will put even more strain on an already struggling greenback.


                    • #12
                      Another preview of the upcoming US Employment data at 13:30 GMT.

                      The estimate for NFP is to rise by 190K after last month's 292K increase.
                      The Unemployment rate is expected to remain steady at 5.0%.
                      The Average hourly earnings are expected to rise by 0.3% MoM and 2.2% YoY (from 2.5% last month).

                      The 3- month average NFP job gain is 284K. In 2015, the average job gain was 221K.

                      The Labor force participation rate moved to 62.6 off the low of 62.4 but still down near low levels.

                      Last month the jobs were broad based with each major sector adding jobs with the exception of the Mining which suffers from commodity price declines. The leading sector was Professional and Business services.

                      The Service Sector jobs are where the most jobs are created - not surprising. The Goods producing sector continues to lag by a large margin. The Goods producing sectors include mining, manufacturing and construction. As mention mining is getting killed by commodities. manufacturing by dollar and low cost manufacturing overseas. Construction jobs are up but they are still way below the peaks from pre-debt crisis.

                      What about clues from the other job indicators?

                      The ADP employment report released on Wednesday estimates a private sector gain of 205K. The estimate is for 180K increase in private sector payroll.

                      The Manufacturing ISM index fell sharply to 45.9 from 48. The Service sector ISM employment index also fell to 52.1 in the current month.

                      The initial claims 4-week moving average has been trending more to the upside since bottoming in October. The 4-week average is at 284.75. Last month it was at 276K.

                      Finally, the trend in earnings YoY have been moving higher but is expected to fall from 2.5% to 2.2% this month. The month on month is expected to rise by 0.3% this month after last month's disappointing 0.0% reading.

                      A bad report will not easily be brushed aside as a one off because the market is on edge right now. A bad report will just be more fuel on this negative fire and the buck will suffer. Unless there's some good news in wages, a headline miss of 50k+ will probably do some decent damage. If wages suffer too then hold on to your hats.

                      A good number, 240+ will take some of the edge off this nervousness. Add good wages and we'll see a decent swing up.
                      Last edited by Steve; 02-05-2016, 10:45 AM.


                      • #13
                        Who's Winning the Global Currency War? Not the ECB.

                        The euro is now at its highest level in over a year, and this has to be more bad news for Mario Draghi. This could force the hand of the ECB to hint at larger cuts & Draghi to jawbone the Euro.

                        "They are now forced to hint at larger cuts -- potentially along with a two-tiered system for bank reserves management -- in order to put their money where their mouth is," said Frederik Ducrozet, an economist at Banque Pictet in Geneva, who tracks the gauge on a daily basis.

                        Here is an interesting article from Bloomberg:


                        • #14
                          Latest MS client note from Morgan Stanley

                          Say Stanley:

                          "Our thesis, is that ahead of the lunar New Year (Feb 8) and China hosting the G20 (Feb 26-27), there is a strong incentive for policymakers to keep RMB stable. Moreover, we note the risk that USDCNH could be driven down in the near term amid recent press reports on speculation against RMB. The FX reserves data over the weekend will be an important test. Given some in the market are expecting a very large decline ($150-$200bn), a smaller fall in reserves could ease market concern and contribute to a near-term strengthening in CNH," MS argues.

                          "However, the price for FX stability is high. It requires preventing capital outflows by offering attractive real yields. The problem is that current real yields may be too elevated to inspire economic growth. Instead, high real yields risk a faster and more painful deleveraging. Hence, economic weakness is likely to stay, in our view. Other Asian surplus economies offer similar dynamics, explaining why we look east and not west when trading FX. Unless, the Fed radically overhauls its current reaction function signaling almost unconditional monetary accommodation, it will be Asian data, the evolution of currency reserves and easier local central bank policy which drive USD and global markets,"

                          "Accordingly, the current USD downward correction should be limited, with implications going beyond FX markets. Correlations are high and the recent USD decline helped catalyze an oil rally, spilling over into tighter corporate spreads and providing shares with an urgently required lift. The high correlations are due to FX, commodity and equity markets trading similar frameworks. This framework is based on overcapacity, leverage and low return on investments. The Fed pausing or the BOJ, the ECB and other European central banks pushing deposit rates into the red will do little to change these dynamics


                          • #15
                            Global Stock Rout Extends in Japan; Credit Risk Climbs With Yen. Risk off market. What will the BOJ do now?