The euro came under selling interest yesterday, tumbling after another set of sluggish PMIs from the Euro area, which may have increased speculation for additional policy measures by the ECB as well as for another delay in the timing of when interest rates could start rising. In the US, both retail sales for March and initial jobless claims for the week ended on April 12th beat expectations, easing concerns with regards to the performance of the world’s largest economy.
The euro traded lower against most of the other G10 currencies on Thursday. It gained slightly only against SEK, while it traded virtually unchanged versus CHF and NZD. The main winners were USD, JPY, CAD and NOK.
The catalyst behind the euro’s slide was another set of sluggish PMIs from the Euro area, with the first hit taken after the preliminary German manufacturing PMI signaled that the sector contracted for the fourth consecutive month in April. The index came in at 44.5, which was slightly higher than March’s 44.1, but below the 45.0 forecast. Half an hour later, the currency felt the heat of the indices from the Eurozone as a whole. The bloc’s manufacturing index rose slightly, to 47.8 from 47.5, but this was just shy of the 47.9 estimate, and still below the boom-or-bust 50 zone. The services PMI slid to 52.5 from 53.3, missing the forecast of a tick down to 53.2. All this brought the composite index down to 51.3 from 51.6.
At their latest gathering, ECB officials reiterated the guidance that interest rates are likely to stay at present levels “at least through the end of 2019”, with President Draghi noting again that the risks surrounding the euro area economic outlook “remain tilted to the downside”. He also added that policymakers will consider “whether the preservation of the favorable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation”. Thus, another patch of disappointing Euro area PMIs could have increased speculation for additional policy measures beyond the new round of TLTROs, which is expected to begin in September, as well as for another delay in the timing of when interest rates could start rising.
The Swedish Krona was the only currency against which the euro managed to eke out some gains. Given that in previous years the Riksbank has been usually following the footsteps of the ECB, fears that the ECB could delay further raising rates may have also raised concerns over the prospect for a Riksbank hike in the second half of the year. Yes, on March 5th, Riksbank Deputy Governor Cecilia Skingsley noted that this remains the plan, but this was two days before the ECB gathering, at which Draghi and co. decided to abandon plans for a 2019 hike. Therefore, we would like to wait for the upcoming Riksbank meeting, on April 25th, to confirm whether officials are still willing (or not) to bring Swedish rates to zero later this year.
After an attempt to push higher, EUR/CAD reached a weekly high at 1.5155, and then started selling off. This move led to a break of the short-term upside support line taken from the low of April 1st. That means that, from the short-term perspective, the pair has a good chance to continue with the slide, especially if it drops below the psychological 1.5000 hurdle. In addition to the downside scenario, EUR/CAD has formed a head-and-shoulders pattern on the 4-hour chart, with the neckline at 1.5053. Although this adds to the case of some further near-term declines, let’s not forget that, overall, the pair is still trading within a wide range, between the 1.4880 and the 1.5215 levels, which means that even if the rate moves lower, it may find itself hitting the lower side of the range.
If EUR/CAD breaks through the psychological 1.5000 area, this would confirm a lower low and the rate may continue sliding towards its next potential support zone, at 1.4970, marked by the low of April 9th. We may see a small rebound back up, but if the bulls are still feeling weak and fail to drive the pair higher, the bears might step in again and push EUR/CAD lower. If this time the 1.4970 hurdle is not able to withhold the downside pressure, a break lower could send the rate to the 1.4925 level, which is marked near the low of April 3rd.
Alternatively, in order to aim for higher areas, at least in the short run, we would need to see a break above the 1.5100 barrier first, which is marked near the highs of April 12th and 18th. This way, more buyers could start joining in and driving EUR/CAD higher, towards this week’s high, at 1.5155. If that zone is just seen as a temporary obstacle for the bulls, a break higher may open the door to a further move north, potentially targeting the upper side of the aforementioned range, at 1.5215.
The dollar and the Japanese yen were yesterday’s big winners against the other G10s, with USD/JPY found virtually unchanged this morning. They gained the most against SEK, EUR an and CHF in that order, while the currency against which they gained the least was CAD, which may have stood tall after Canada’s better than expected retail sales for February.
We got retail sales data from the US as well, but for March. Alongside the initial jobless claims for last week, they may have been the fuel behind the greenback’s strength. Headline sales increased 1.6% mom, the fastest pace in 1.5 years, after sliding 0.2% in February, also exceeding the forecast for a 0.9% mom rebound. Core sales, which exclude automobiles, rose 1.2% mom, after falling 0.2% as well. The forecast was for a core rate of +0.7% mom. With regards to initial jobless claims, they dropped from 197k to 192k, the lowest in nearly 50 years, beating expectations of a rise to 205k. The claims point to a sustained strength in the labor market, and combined with the retail sales, they may have eased further concerns with regards to the performance of the world’s largest economy.
Consumer spending, which appears to be boosted by a tight labor market, accounts for more than two thirds of the US economic activity and thus, the strong retail sales prints led to upside revisions in estimates for Q1 GDP. The Atlanta Fed GDPNow model is now suggesting that the economy grew +2.8% qoq SAAR in the first three months of 2019. Just yesterday, it pointed to a +2.4% growth rate. In our view, all this turns the spotlight to next week’s 1st estimate of GDP for Q1. Investors will be eager to find out whether indeed the economy performed better at the start of this year, or not.
Having said all that though, the upbeat data are still far from suggesting that a 2019 hike could be brought back under the Fed’s microscope and investors appear to agree with us. According to the Fed funds futures, the still see no chance for such a move this year. Following yesterday’s data, they just reduced somewhat their cut bets. They now see a 43% probability for interest rates to be lower by December. Yesterday, that percentage was at 47%.
USD/CHF experienced a great rally this week, where the pair climbed around 150 pips. We can see that the rate found new resistance near the 1.0160 hurdle, which now will become an important level to watch, as it may act as a gateway to some higher areas, if it gets broken. Our oscillators are showing signs of topping, but they are still in the positive territory, which comes in line with the idea of seeing a small correction lower, before another leg of buying.
A drop below the 1.0143 hurdle might bring USD/CHF a bit lower, which may lead to a test of the 1.0125 support zone, marked by the highest point of March. If the bears struggle to push the rate below that zone, this is when the bulls might decide to step in again and drive the pair back up, potentially towards the recent highs, near the 1.0160 barrier. Slightly above it sits another strong resistance area, at 1.0170, which is marked by the highest point of March of 2017.
In order to consider deeper extensions to the downside, we need to see the 1.0125 hurdle getting broken, which could raise concerns over the USD/CHF’s upside potential in the short run. But for a better confirmation of the downside, we would wait for a break below the 1.0110 support zone, marked by Wednesday’s high. This way, the bulls might temporarily abandon the field and let the bears take the steering wheel. Such a move could lead to a test of the 1.0095 obstacle, a break of which may increase the pair’s chances for a further move south, potentially aiming for the 1.0077 level, marked by the intraday swing low of April 17th.
Today is Good Friday for most of the G10 nations and thus, their respective markets will be closed. We only get US housing starts and building permits for March. Building permits are expected to have increased 0.3% mom, after sliding 2.0% in March, while housing starts are forecast to have rebounded 6.5% mom following an 8.7% mom tumble.
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