Weekly Currency Thought: Weekly Currency Thought: Bearish BCB actions not over yet, Brazilian Real (BRL) remains at risk for now
The BCB has delivered another 75bp rate cut in the Selic rate (to 9%) last week. This was in line with expectations and took the cumulative monetary easing to 350bp since the beginning of the easing cycle (last August). The main surprise was not the rate cut…
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per se, but the fact that the policy statement did not hint that an end in the easing cycle may be imminent. In that respect, this week’s COPOM minutes will be crucial: a confirmation that additional rate cuts are feasible would most likely exacerbate further the current bearish bias on the currency. GDP growth will most likely accelerate back above trend in Q2, driven by an accelerating private consumption – which is supported by a healthy labour market and improving real disposable income on the back of declining inflation and rising minimum wages. The manufacturing sector has disappointed of late and a weaker currency would most likely be welcome by the export-driven industries, but looking at the broad macro-economic climate, additional monetary easing is not necessarily justified at this point and this raises credibility issues. All this is in line with the recent step up in the BCB FX interventions. Not only have the government/monetary authorities shown a zero tolerance approach when it comes to currency strength this year, but they have actually been actively following policies aimed at weakening the BRL further, even at levels at which the monetary authorities would have theoretically been expected to be comfortable with, say a year ago (i.e 1.80/1.85). We remain of the view that notwithstanding a still bullish longer-term structural outlook, the current monetary/interventionist FX policy approaches should leave the BRL vulnerable (across the board) for now, with a m-t resistance target at 1.90 on USD/BRL.
EUR: Near-term downside risks persevere
The current eurozone environment is short of supportive forces at this point: we have been highlighting this in the past couple of weeks and reiterate our view. Returning concerns over the debt crisis (Spain in particular) have obviously come back to the forefront, keeping a high premium in intra-euro spreads. In this respect, there should be continued attention paid on the eurozone auction results, with Italy of interest this week. Attention should also stay on France, with question marks over what a change in leadership could mean for the Franco-German relation and for the approach endorsed in dealing with the eurozone debt crisis. In theory, all this could trigger n-t euro weakness. EUR/USD is stuck in a range, with 1.3060 holding as an extremely important support while resistance is seen at 1.3175/1.3225. Instead, bearish euro positioning has become more appealing on eur/crosses, with bearish EUR/GBP and to some extent EUR/NOK increasingly popular. Data wise, the preliminary April PMIs will be of most interest this week.
USD: FOMC back to the forefront
The Federal Reserve comes back to the forefront this week. No change is expected from the FOMC on the current monetary conditions or in the expected interest rate profile, with the low interest rate environment (until 2014) message expected to be confirmed. As we have argued in the past, this is USD negative, but the real challenge here is to assess whether the market will ‘buy’ into this dovish Fed policy outlook. The answer is mainly data dependant and last week’s softer US economic releases – see the latest housing data and Phili Fed indices – have reinforced the doves’ case. This week, the preliminary Q1 GDP data will be of most interest. We have a Bloomberg consensus at +2.5% for US Q1GDP, down from a 3% annualized growth rate in Q411, but still largely outpacing the eurozone’s. Note that the current US GDP growth rates are consistent with persistent negative output gaps – a compelling reason to expect the Fed to stick to a low rate environment for now. This is a key force justifying a still relatively bearish m/t USD outlook.
GBP: Our bullish call is gaining momentum
Our bullish sterling case has gained momentum in the past couple of weeks. Some better UK economic news (PMIs, retail sales), a still relatively high inflation environment and a marginally less dovish than expected April BoE MPC meeting minutes have set GBP bulls in a stronger position in the past few sessions. The stickiness in EUR/USD has limited the upside on Cable, but the recent break of 1.6090 is opening the way for a move up to 1.6290/1.6300 (76.4% retracement of the sell-off from August 2011). In the current context, EURGBP and GBPJPY continue to be our favourite ways to implement bullish sterling views, especially after some important technical levels (0.82 and 130.00) were broken last week. On the data front, the Q1 GDP data due this week will confirm a still sluggish and subtrend growth environment in Q1 (expected at just +0.1% q/q, +0.3% y/y), but as we pointed out in the past, the more positive UK growth story is unlikely to materialise before H2.
JPY: High expectations from the Bank of Japan
The recent BoJ policy remarks have clearly hinted that a further increase in the APP (by Y5tn to Y10tn) is most likely at this week’s BoJ meeting (April 27th). This has conditioned a softer tone on the JPY this past week and is arguably priced in at this point. Indeed, we would argue that a larger than expected APP announcement and/or an increase in the BoJ 1% inflation target (to 2%) may be required to see a break of the recent yen lows. Beside the domestic considerations, we also note that the slightly more favourable risk environment of this past week is most probably required to expect renewed and sustained yen weakness. Furthermore, when it comes to USD/JPY, the US yield curve (2 year in particular) is arguably as important as the BoJ policy outlook in setting the trend and a still fairly dovish FOMC this week is unlikely to help a significantly more bullish near-term USDJPY positioning. Datawise, the latest employment, retail sales, IP and CPI data are all due this week.
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