USD: US jobs report offers a mixed bag of news
Last Friday's jobs report offered something for everyone. On the one hand, the much weaker than expected expansion in non-farms payrolls of +113k (the market had expected +175k) was a disappointment as it suggested momentum had slowed into the start of 2014. On the other hand, the solid 638k addition to household employment was good news, particularly as it caused the unemployment rate to fall to 6.6%. The market responded with confusion. Initially "risk on" currencies rallied on the weaker than expected NFP headline, but this move quickly unwound on the better than expected decline in unemployment. The day ended with "risk on" currencies largely flat against the USD.
Attention now shifts to Yellen's semi annual testimony before
AUD: RBA moves to a neutral stance
The Reserve Bank of
We believe this is good news for our bearish AUDUSD forecasts. As we have discussed previously, we believe the RBA is only likely to cut rates again if Australian economic outlook deteriorates substantially, or the AUD rallies significantly. We think neither scenario is likely. Consequently, we thought the market had become too dovish about Australian rates, and saw this as an impediment to further near term AUD weakness. With these expectations now removed, we believe AUD positioning is much cleaner. We believe this is a good opportunity to re-establish short AUDUSD positions.
In our opinion, the Australian economy is still weak. Even with last week's upward revisions to it growth forecasts, the RBA still expects a period of below trend growth "for a time yet". Externally, the on-going fall in Chinese investment growth presents another challenge for the Australian economy. This is not an environment which typically supports currency strength, particularly against the currency of a country which is on a cyclical upswing, such as the USD and NZD.
MXN: Moody's upgrade reinforces our long term view, but domestic headwinds challenge short term performance
Moody's surprised the market with an upgrade to
The near term outlook for the MXN remains challenging. The domestic economy is still showing signs of fragility, with many indicators pointing down. For example, data show consumer confidence fell again in January to 83.4 – its lowest point in almost four years; the manufacturing PMI suggested the sector fell back into contraction in January; and many of the PMIs subcomponents such as employment and new orders also disappointed in January. One bright spot was the solid print from the service sector PMI of 53.2, though even here the subcomponents were a worry. In our opinion, the MXN will continue to struggle to catch up with the USD while these domestic headwinds persist. As such, we prefer being long the MXN against currencies where we expect broad based underperformance – such as the JPY.
EUR: The market wanted more than repetition
Last week's ECB meeting brought little news. The policy meeting itself produced no change to the refi rate (0.25%) or the deposit rate (0%) and Draghi's subsequent press conference provided no new information. The EUR rallied on headlines of "no change" suggesting the market had expected a more definitive response to the euro area's low inflationary environment.
We continue to believe that low inflation will not prompt a response from the ECB. In fact, in the absence of exchange rate movements, low inflation is part of the necessary adjustment to restore competitiveness across the euro area. Consequently, we only think the ECB will act if the downward trend in inflation is re-established. We think this is unlikely while the euro area's PMIs continue to print solid results.
An unwarranted tightening in money market conditions remains the most likely reason why the ECB could loosen policy further, in our opinion. So far, we have viewed a refi rate cut as their preferred tool to loosen policy. We believe this would be a short term negative for the EUR. However, the Bundesbank's recent failure to deny press comments that it would favour ending the ECB's weekly sterilization auction, suggests this could also be a possible option for the ECB. If used, this option would increase the liquidity surplus in the euro area and have a more long lasting impact on the EUR. We remain modestly bearish on EURUSD, targeting 1.33 in 1 year.
With client assets of
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