The pound succumbs to EU worries
There are some signs that dollar strength is being felt against more than just the yen. GBPUSD has been under pressure, and is the weakest dollar cross in the G10 today. The pound fell below 1.60 earlier, leaving the next major support level at 1.5910 – the 200-day sma. The sell-off gathered speed at midday London time when Prime Minister’s Questions (PMQ) began. The focus was firmly on Britain’s position in the EU as we lead up to Cameron’s speech to define the UK’s relationship with the EU that takes place on Friday at 0900 GMT in the Netherlands. This has to be Cameron’s biggest speech yet – the world is looking to see if Cameron turns his back on Europe or if he tries to clarify Britain’s complex relationship with its largest trading partner. There has been a lot of pressure on the UK, including from the assistant US Secretary of State (Hillary was ill), to halt the UK’s drift away from Europe. Although Cameron’s stance is likely to stress the need for the EU to be more competitive, the market may think that the timing is not helpful. The Eurozone sovereign debt crisis is showing signs of stabilising, the last thing the market’s needs right now is the prospect of Britain breaking up the EU. Usually the market turns a blind eye to the UK government’s bickering with its European partners, but this speech has stoked attention and we could see GBPUSD struggle to recover until after this speech is over.
Nordic currencies follow the BOJ’s lead
Back to currency wars, the desire for a weaker currency has spread from Japan to the Nordic countries. In the last 24 hours we have heard twice from Norwegian officials that the currency is too strong and monetary policy needs to be loosened. Likewise, Svensson, a member of Sweden’s rate –setting Riksbank, also said that he sees a major problem with Sweden’s monetary policy that has been too tight since summer 2010. The deputy governor is regarded as an unspoken dove on the Riksbank, today he made an impassioned plea that the 8.1% unemployment rate is becoming entrenched and the inflation rate should be allowed to over-shoot its 2% target. The SEK initially fell on the news, but has since re-cooped some losses and is flat on the day. The next major resistance level in EURSEK is 8.64 the 200-day sma. A break above this level is a bullish development for this pair that opens the way for a move back to the 8.80 highs from mid-Dec. However, it may take a push from the central bank to get to this level in the medium-term.
Why central banks matter
EURNOK and USDNOK have performed better than the SEK crosses, with the dovish rhetoric hitting the NOK hard today. EURNOK is testing the 200-day sma at 7.42, above here opens the way to 7.5, the high from October.
But why do currency wars matter for the markets? Trying to weaken your currency is a form of protectionism that is bad news for the global economy. The Fed has been accused of debasing the dollar, the BOJ and SNB in Switzerland have also openly tried to weaken their currencies, and hence some in the FX world see this as unfair and want to join in. While we need to see Japanese, Norwegian and Swedish officials follow through with looser policies before we may see a prolonged negative effect on their currencies, the FX market may well become jittery as we wait and see how much bite these central banks’ actually have.
Strong bank results fail to move markets
Economic data has also been in focus today. Headline CPI for December declined in the US to 1.7% from 1.8% in November, while industrial production rose in line with expectations at 0.3% last month. Eurozone inflation held steady at 2.2% at the end of 2012. US stock markets have failed to react to better than expected bank earnings for Q4 from Goldman Sachs and JP Morgan. The US markets have opened fairly flat. However, the 3% jump in Apple’s stock price has helped to keep the Nasdaq afloat. Since Apple is such a large stock, if it continues to get bought then we may see gains in the wider global stock markets. Thus, overall we are still in risk-off territory although the pace of declines has slowed today, and we could experience some sideways movement in the next few hours in the major indices and crosses.
One to Watch: USDJPY
USDJPY has been the star trade of 2013, but it has stalled for most of this week and fallen approx. 150 basis points. This index was starting to look oversold earlier below 88.00 and indeed it did recover. Currently it is testing 88.50. We believe this index could make another stab at 89.00, but in the short term the rally may not last as the spread between Treasury yields and Japanese government bonds has stalled after rallying in recent weeks, as you can see in the chart below. Treasuries have fallen back through 1.82% today, which may limit dollar strength in the near term. As we lead up to the BOJ meeting this cross could trade in a fairly tight range with selling pressure ahead of 89.00 and buyers coming in to support this cross at 87.50.