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BIG RELIEF ON STERLING

max@khongwir.org (Sibalene) — Tue, 30 Apr 2013 15:21:46 +0530

GBPUSD up more than 1-big figure to 1.5400 after GDP rose 0.3% in Q1 (expected 0.1%). After the 0.3% decline in Q4 2012, this means that the UK economy was essentially flat over the past 6 months. The reaction on the currency is a lot for a GDP release 0.2% above expectations, but this reflects 2 things. Firstly, the fact that the market was fearful of a decline leading to increased pressure for more QE. Secondly, the media (for what it's worth) will now not be able to talk of a tripe-dip recession. This also means that the uptrend in cable in place from a technical perspective.

SLICING UK GROWTH

max@khongwir.org (Super User) — Tue, 30 Oct 2012 15:55:12 +0530

The most important aspect of this latest UK GDP reading is the sorting of the short-term noise from the underlying soundtrack. Once that’s done, the story is of an economy growing, but only just. With the economy expanding 1.0% in Q3 and contracting 0.4% in Q2, we’ve seen growth average 0.3% over the past two quarters. Even now though, we can’t quite take this at face value. Yes, the output lost in Q2 owing to the extra public holiday (which cut around 0.5% from GDP) was likely largely reversed in Q3. But there was also the Olympic 'bounce'. The stats office assesses that ticket sales alone boosted GDP by 0.2% in the third quarter. But no attempt has been made to fully quantify the Olympic contribution and, nevertheless, it won’t all be positive (i.e. spending will have shifted from other activities).

For the optimists, this morning’s figure does mean that the UK has exited recession, the second of the past four years. Furthermore, the economy has not recovered half of the peak-to-trough decline in output seen in the recessions of 2008 and early 2009. Still, this sits in stark contrast to the US and Germany, where output has comfortably surpassed (by 2.1% and 1.7% respectively).

So where does this leave the pound? Looking beyond the initial and understandable bounce, EUR/GBP remains in a wider uptrend, so we need another 1.1% down-move to really change sentiment here for the longer-term players (weeks). The focus now turns to next month’s BoE meeting. If there were any take-outs from King’s speech earlier this week, it was that he was not minded to expand QE further without a renewed downturn in the data. But it’s too simplistic to say that lack of further QE will be supportive for sterling as the QE/FX interplay has become a lot more clouded of late. That said, the anticipated rise in inflation could well cause renewed problems for the UK authorities into year-end, putting renewed downward pressure on sterling.

THE NEW YEN

max@khongwir.org (Sibalene) — Tue, 30 Apr 2013 15:40:12 +0530

Data/Event Risks

USD: The main focus will be with the consumer confidence data at 14:00 GMT. Last release saw the headline reading fall to 59.7, with the market looking for a small rebound to 61.0. Dollar has been more resilient to weaker US data recently, partly owing to weaker than expected readings in non-US data.

EUR: After the weaker survey data last week, focus on the German labour market numbers. Weakening here could further seal an ECB rate cut this week. Unemployment rate is seen steady at 6.9%. Eurozone inflation is expected softer from previous 1.7%.

Idea of the Day

On several fronts there are signs that the yen is turning around from the strong weakening trend seen so far this year. We’ve not seen the exodus from domestic investors that was anticipated into overseas assets. Indeed, they have been reducing them. Reports from investment banks suggest their client flows are less bearish towards the yen and the weekly CFTC data (which shows extent to which non-commercial futures traders are short/long) has shown yen short positions being reduced. And the options market is also suggesting (falling risk reversals) less bearishness in pricing. All of these are merely snapshots, often of a small piece of the market, but all suggest that sentiment towards the yen is not as bearish as it once was. For now, a push above 100 on USDJY is likely to prove elusive.

AS YOU WERE

max@khongwir.org (Sibalene) — Tue, 30 Apr 2013 15:39:01 +0530

Data/Event Risks

ALL: Ears will be turned towards Washington where many leaders are gathering for the IMF and G20 meetings over the coming days and weekend. The market will be sensitive to fresh comments or view on the latest developments on the yen, but we don’t expect much in the way of raised tensions on this front.

GBP: The retail sales numbers at 08:30 GMT round off a busy week for UK data. The February numbers were firm, with headline sales rising 1.9% MoM so March is expected to give some of that weakness back (expected 0.6% decline). If we do see a stronger than expected number, then sterling will benefit on the basis that this is one of the last of the data releases before the Q1 GDP estimate is released next week.

Idea of the Day

The coming days sees lots of gatherings in Washington including G20 leaders. A draft of the statement being carried on Bloomberg suggests that their language on currencies is little changed from the sentiments seen in February. Back then, there were concerns that Japan would come in for criticism for its policies and their impact on the yen. This did not come to fruition, but we have seen less direct commentary from Japanese officials on the currency since that time. As we mentioned yesterday, after the initial flurry surrounding the Japan’s announcements earlier this month, we may need to see some data moving the Bank of Japan’s way before we see a sustained moved above 100 on USDJPY. The overnight data (showing Japanese investors were still sellers of overseas bonds) was not supportive for yen bears.

MORE DOLLAR GAINS

max@khongwir.org (Sibalene) — Tue, 30 Apr 2013 15:38:03 +0530

Data/Event Risks

USD: The market is pretty good at shaking off errant numbers on the durable goods side, with the biggest data surprise over the past year only seeing at most 12-15 pips change in EURUSD in the subsequent half hour of trading. Market looks for partial reversal from headline gain of 5.7% in March.

EUR: The German IFO data will be a key focus for the euro today after the release of weaker PMI data for Germany yesterday. There are real fears that Germany may contract in the first quarter and this release could further shape those expectations. Market was looking for fall in headline from 106.7 to 106.2, but that would now be met with modest relief rally on the euro after yesterday’s data.

Idea of the Day

There will be a strong focus on the data out of Germany today and expectations are increasing that the ECB will cut rates when it meets next week. Once again, we are seeing changing dynamics in FX markets, with the dollar’s move to a strong positive correlation to US data surprises having been falling more recently. It seems that the weaker being seen beyond the shores of the US is having an increasing impact on dollar dynamics, as both Europe and China have a more disappointing growth outlook. The other point to note is that we are seeing a familiar patter emerge, namely early year optimism leading to second quarter disappointment, something that has been seen for the previous two years (see “Growth and FX” for more). If this pattern continues, it could spell further gain for the dollar in the coming weeks.