Own vulnerability of the euro evident last week, resulting in a correction of the single currency ..…
Downtrend of the yen confirmed (against the dollar), with an easing of the positive correlation between the yen and risk aversion. In addition to the ECB and BoE meetings, which are not expected to have major market impacts, the Bank of Canada will also meet on Thursday.
(Australian and New Zealand central bank meetings on Monday and Tuesday).
EUR – Last week we wrote that the euro had reached a point from which it was not clear whether it was ready to leap upwards or turn back down. However, we concluded by stating that we had a slight preference for the view that a short correction phase was in the making.
This has proved to be the case.
From last Friday’s high of EUR/USD 1.3487 – a level it was no longer able to overcome, and at which it set a triple top, the euro has corrected, dropping back into the 1.32 area. This area is important, as the 1.3233-1.3165 corridor defines the upper limit of the downside front starting at 1.25-1.26. The exchange rate was pushed downwards by the further dragging on of the issues which “make up” the Greek situation. The fact that the exchange rate dropped while sovereign spreads tightened, suggests a certain degree of own vulnerability of the single currency, emphasised by the failed attempt to test 1.3500.
Technically, compared to a week ago, the configuration has become skewed to the downside.
As the main issue of the Greek situation, i.e. assessment of the state of advancement of the PIS deal, has been pushed back to the end of next week (presumably to Friday, 9 March), at least an attempt to break through the 1.3233-1.3165 on the downside could take place. Downside targets below 1.3165 are: 1.3030 – 1.2827 – 1.2624. The ECB meeting on Thursday should not
represent a major market mover this time around.
while the euro wakened.
Two simultaneous factors led to this behaviour: (i) the vulnerability of the euro, (ii) the mixed nature of data on the UK economy. As the latter did not show a clear deterioration, sterling climbed to just shy of GBP/USD 1.6000 (reaching a high at 1.5993). At this level, however, it is overvalued, even only in a very-short-term perspective.
However, univocally negative data would seem to be necessary to activate a correction towards GBP/USD 1.56-1.55. Important releases next week will be the services PMI (Monday) and output data (Friday), all expected on the decline (our estimates are more pessimistic than consensus).
On the other hand, we do not expect changes in terms of monetary policy parameters, nor particular news from the BoE meeting on Thursday.
As regards the exchange rate against the euro, barring positive surprises from data on the UK economy, sterling could at least in part correct (returning into the 0.84 EUR/GBP area), especially
in the wake of this week’s sharp rebound from EUR/GBP 0.85 to 0.83.
Against the euro it dropped to just shy of EUR/JPY 110, and then stabilised back at EUR/JPY 108.
In the very short term, the direction of the EUR/JPY could depend on the EUR/USD, in the sense that a potential further retracement towards EUR/JPY 106 would in all likeliness be due to a further correction of the EUR/USD, rather than to a drop in the USD/JPY.
CAD – Next Thursday the Bank of Canada will also meet. Expectations are for stable rates at 1.00%, in the coming months as well. However, it will be important to verify whether in its press release the BoC will prove less pessimistic with regards to the prospects for domestic economic growth this year. In mid-January, it had expressed expectations for a slowdown in the months ahead, in light of the deterioration of the global picture. More in detail, the central bank forecast a slowdown in growth to 2.0% this year, and a subsequent recovery to 2.8% next year.
Barring an improvement in the scenario, the Canadian dollar could shed this week’s gains (appreciation against the US dollar from USD/CAD 1.00 to 0.98) and ease back to around parity.
In the opposite case, the strengthening should continue, with a target set at around USD/CAD 0.9725.
Appendix
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