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6 Mar 2013
Fundamental Morning Wrap: CAD you believe it, rate decision in focus
On the morning that Venezuela leader Hugo Chavez finally passed away after months of repeated speculation over his supposed death, the initial market reaction looks to be muted, possibly as the impact may be long priced in already. Nevertheless, the news has failed to make any of the mornings institutional research with focus falling on today and tomorrows central bank action, most notably the ECB and BoC rate decisions this afternoon and tomorrow respectively.
EUR
Derek Halpenny of BTMU notes that yesterdays ECOFIN meeting produced little of substance, but sees that the fallout from the Italian election could be positive if it pressures the EU to rethink its austerity drive. Danske Bank analysts feel that with Draghi likely to signal that a rate cut would have been discussed within the council and US employers likely continuing to add jobs at a decent pace (watch ADP report today), the near-term risks for EUR/USD are tilted to the downside. ING analysts feel that despite the still bleak economic outlook and new political uncertainty, they expect the ECB to keep rates on hold at tomorrow’s meeting. They write, “The ECB seems to have little appetite to pull the chestnuts out of the fire for indecisive politicians.” Kit Juckes of SocGen feels that EUR/USD has bounced with the risk mood and with some vague hope that a technocrat government could be formed in Italy, he feels that it is hard to see a driver of fresh Euro weakness.
CAD
Geoffrey Yu and Gareth Barry of UBS feel that today´s BoC decision could prove a make-or-break event for CAD, noting that in the G10 space only JPY and GBP have performed worse this year. However, they note that capitulation could soon follow if the bank decides to be any more dovish than it was in January. Danske Bank analysts recommend watching out for the Bank of Canada's rate decision this afternoon. They feel that most likely no rate change will come but with investors now net short CAD and the market increasingly set for a more dovish Carney and co after the latest deterioration in data, it should not take much to support CAD from here. ING analysts feel that the BoC looks set to hold rates with the possibility of removing its hawkish bias. Meanwhile Jane Foley of Rabobank notes that CFTC data has recently heightened a strong trend away from CAD longs in favour of short positions. She writes, “Since the market appears to be heavily positioned for a bearish BoC event this afternoon, on a risk reward basis we see solid case in favour of taking a long CAD position into the meeting.”
GBP
ING analysts feel that tomorrows MPC decision will be a close call, but on balance, they suspect that it will choose to spend an extra GBP 25bln on gilt purchases Kit Juckes of SocGen recommends watching EUR/GBP, which is “now consolidating after the rally from 0.78 to 0.88, and vulnerable to a slide lower if 0.86 breaks.”
USD
ANZ´s Richard Yetsenga wonders whether we are approaching the end of the USD rally, noting that it reflects little more than a pause in flows into risky assets. He expects the dollar to remain soft as the global economy heals, and the US´s large basic balance deficit becomes more difficult to fund.
Macro
ANZ´s Richard Yetsenga feels that China’s pre-emptive tightening suggests the RMB will continue to do well, though at the margin takes out some of the upside for regional asset markets. ING analysts note that they expect the PBOC to appreciate the USDCNY fixing rate toward 6.32 in the short term, which we think will cause spot USDCNY to appreciate against the fixing rate.
EUR
Derek Halpenny of BTMU notes that yesterdays ECOFIN meeting produced little of substance, but sees that the fallout from the Italian election could be positive if it pressures the EU to rethink its austerity drive. Danske Bank analysts feel that with Draghi likely to signal that a rate cut would have been discussed within the council and US employers likely continuing to add jobs at a decent pace (watch ADP report today), the near-term risks for EUR/USD are tilted to the downside. ING analysts feel that despite the still bleak economic outlook and new political uncertainty, they expect the ECB to keep rates on hold at tomorrow’s meeting. They write, “The ECB seems to have little appetite to pull the chestnuts out of the fire for indecisive politicians.” Kit Juckes of SocGen feels that EUR/USD has bounced with the risk mood and with some vague hope that a technocrat government could be formed in Italy, he feels that it is hard to see a driver of fresh Euro weakness.
CAD
Geoffrey Yu and Gareth Barry of UBS feel that today´s BoC decision could prove a make-or-break event for CAD, noting that in the G10 space only JPY and GBP have performed worse this year. However, they note that capitulation could soon follow if the bank decides to be any more dovish than it was in January. Danske Bank analysts recommend watching out for the Bank of Canada's rate decision this afternoon. They feel that most likely no rate change will come but with investors now net short CAD and the market increasingly set for a more dovish Carney and co after the latest deterioration in data, it should not take much to support CAD from here. ING analysts feel that the BoC looks set to hold rates with the possibility of removing its hawkish bias. Meanwhile Jane Foley of Rabobank notes that CFTC data has recently heightened a strong trend away from CAD longs in favour of short positions. She writes, “Since the market appears to be heavily positioned for a bearish BoC event this afternoon, on a risk reward basis we see solid case in favour of taking a long CAD position into the meeting.”
GBP
ING analysts feel that tomorrows MPC decision will be a close call, but on balance, they suspect that it will choose to spend an extra GBP 25bln on gilt purchases Kit Juckes of SocGen recommends watching EUR/GBP, which is “now consolidating after the rally from 0.78 to 0.88, and vulnerable to a slide lower if 0.86 breaks.”
USD
ANZ´s Richard Yetsenga wonders whether we are approaching the end of the USD rally, noting that it reflects little more than a pause in flows into risky assets. He expects the dollar to remain soft as the global economy heals, and the US´s large basic balance deficit becomes more difficult to fund.
Macro
ANZ´s Richard Yetsenga feels that China’s pre-emptive tightening suggests the RMB will continue to do well, though at the margin takes out some of the upside for regional asset markets. ING analysts note that they expect the PBOC to appreciate the USDCNY fixing rate toward 6.32 in the short term, which we think will cause spot USDCNY to appreciate against the fixing rate.