NORDEA: What's On The Cards For EUR/USD This Week?

We are all in. Broad signals of growth momentum from global PMIs – both manufacturing and services, also the euro area divergences receding. Thus, no surprise, even with US, UK 10Y government yields hitting 3% last week, stocks, commodity currencies,  EMs caught breath. We can afford to live with the 3% nominal rate in the 3% real growth world, can’t we? (yes, but [insert here]).

Figure 1. 10Y sovereign yields

If we can live with this sentiment for a while, the commodity currencies could bounce more here. This applies also for EMs (ZAR, RUB). Note also, the macro data surprise indexes for commodity currencies are on the low side, historically, while the short positions are on the high side, giving room for sharper reversals. Hope you joined in my recommendation to short EURAUD in July (still very much valid). No secret, I switched to AUDUSD in August, which now it faces a technical moment of truth – make it, or break it (Figure 2). (Also, the AUDJPY now at a key juncture). Starting with a small beat on exports today, there is plenty of data from China hitting wires this week (IP, capex, retail sales on Tuesday)… could do the trick.

Figure 2. AUDUSD

Taper the USD. Friday’s payrolls is a goldilocks – not good enough to suggest Fed are behind the curve, but not too bad either, thus keeps the baseline for Septaper open, but market expectations closer to a mini taper, ie 10-15bn per month. Unemployment rate at 7.3%, just 0.3% away from the 7%, where the QE should end, according to Bernanke (and that’s mid-2014 in their forecast), makes my old idea of a lower threshold (remember Kocherlakota suggested 5.5%) an increasingly attractive option. This would take the USD yields (in particular, FX-relevant short yields) down, and hurt the USD, giving more space to EMs and commodity FX. I suggest we all start anticipating this now, and make it happen! Two-bar-USD-reversal, that is (Figure 3).

Figure 3. USD index.

Look through the recent interest rate increase - outcome of the ECB meeting. The money market rates left stable - even a few basis points higher Euribor futures for the week. Note, the LTRO repayments have reaccelerated (EUR 10.6bn down over the past 2 weeks), thus little reason for interest rates to fall for now. As hoped for, the ECB did not change the CPI 2014 forecast, reiterated unchanged reaction function, which left the EUR relatively unscathed. A new paper from ECB on labor market last week concludes:  “We find a significant shift in the euro area Beveridge curve since the onset of the crisis, but considerable heterogeneity at country level.“ – a case for a less dovish ECB, and no unemployment rate thresholds.

This week’s data point is EMU industrial production (Thursday), the expectation bar is lower due to weaker German figures last week. But a mini “manufacturing renaissance” in Europe this year?  At least not worse than in the US (Figure 4). Still long EURUSD, hoping “bunga bunga”does not get too loud this week, and Draghi sounds like a broken record on Thursday.

Figure 4. Manufacturing – EMU vs US

Yep, can’t fight it, Carney. The BoE forward guidance is powerless in the face of manufacturing PMI at 57.2, and other figures which have gone vertical recently. Finally the EURGBP made it lower where I liked it, and a break of 0.8400 would open room for a freefall to the 0.8200-0.8250. I bet on it, but vs USD for now. This week’s highlight - the UK unemployment rate on Wednesday. Unchanged (7.8%) is a consensus, still some way to 7% target. It will take the whole 3 years to get there, according to BoE…meh. Pressure on the downside (Figure 5).

Figure 5. UK unemployment rate

 

JPY…a special case.  The USDJPY did make a break-out, to the upside last week, and now retesting (Figure 6). I still hold USDJPY short, as a hedge for now against worsening sentiment and a bet on a broad short term USD weakness. Note also, the EURJPY…still triangle…Nikkei…still triangle…and no reason for the US yields to rise more until FOMC meeting. And, pardon, but I refuse to see Olympics in 2020 in Japan as an explanation for JPY in the short term.

Figure 6. USDJPY

P.S. Overall, rather dull calendar this week. The only thing left is deriving the probabilities of tapering scenarios for September 18th. (Kill. Me. Now…)