Consolidation as Market Awaits Next Fundamental Impact
28/04/09 20:51
We have our Charlotte, NC workshop this weekend which
I am very much looking forward to. The workshops are
very intensive and I know that anyone who attends is
serious about trading. We learn about the real
institutional FX market and specific strategies,
rather than some get rich quick grail which usually
end up putting funds into the accounts of my workshop
attendees.
Economic data provided some surprises on an otherwise quiet day as investor risk sentiment remained subdued. The Conference Board Consumer Confidence Index surged from 26.9 in March to 39.2 in April, well above the consensus estimate of 29.7. While the index is still in historically low territory, the print was a positive development as the expectations portion of the index rose. We're doubtful this, what is to be considered a leading indicator, is meaningful at this stage. Rather, it is simply a positive wiggle in a macro negative scenario. Meanwhile, the number of confirmed swine flu cases continued to rise, though the information had less of a pronounced impact than previously. One of the big three US automakers is reported to have made progress to reduce its debt burden ahead of an end of the month deadline imposed by the government but nothing has yet been confirmed.
Economic data provided some surprises on an otherwise quiet day as investor risk sentiment remained subdued. The Conference Board Consumer Confidence Index surged from 26.9 in March to 39.2 in April, well above the consensus estimate of 29.7. While the index is still in historically low territory, the print was a positive development as the expectations portion of the index rose. We're doubtful this, what is to be considered a leading indicator, is meaningful at this stage. Rather, it is simply a positive wiggle in a macro negative scenario. Meanwhile, the number of confirmed swine flu cases continued to rise, though the information had less of a pronounced impact than previously. One of the big three US automakers is reported to have made progress to reduce its debt burden ahead of an end of the month deadline imposed by the government but nothing has yet been confirmed.
We maintain our neutral stance on the dollar. Swine flu concerns and the pending results of the bank stress tests will bolster dollar bears while dollar bulls will look to dollar liquidity and the US's relative position in the current economic cycle as strengths. Ahead today, Q1 GDP and the FOMC rate decision are due. We are looking for -4.5% annualised on GDP and for no change in the current Fed Funds target range. The accompanying FOMC statement will be scrutinized to see if the economic outlook has changed significantly.
ECB Executive Board Member Bini Smaghi highlighted an alternative to the asset purchase programs adopted by the BoE and the Fed. He discussed "indirect QE," which would increase the size of the ECB's balance sheet by lending to banks at longer maturities against collateral which includes impaired assets. Bini Smaghi added that "this policy affects directly the yield curve over the horizon at which policy operations are conducted or committed to be conducted" and said the horizon of the yield curve that would be affected may be lengthened to the extent that the central bank commits to conduct such type of tenders for a given period of time. UBS rates strategists think that the ECB is most likely to adopt indirect QE, possibly as early as May 7, and the shorter-end of the yield curve up to the two and a half year horizon will likely be affected. We think the news is marginally bearish for the EUR. A temporary drop in shorter-term yields will not benefit EURUSD and the rising amount of impaired assets on the ECB's balance sheet also does not bode well for the EUR. The euro's reaction to indirect QE will likely differ from the dollar's reaction to massive Fed balance sheet expansion because the demand for a liquid, safe store of wealth helped the dollar overcome the negative perceptions from credit easing and lower relative rates with the Eurozone. Investors have thus far failed to adopt the euro as a comparable safe haven. We think EURUSD risks remain to the downside and we maintain our 1/3m forecasts at 1.30 and 1.25, respectively.
Source: UBS, Bloomberg, Credit Suisse, Chris Lori CTA