By Dino Zannoni
THE FATE OF THE EURO AGAIN IN DRAGHI’S HANDS
ISM AND UNEMPLOYEMENT
Due to the strong rise of the U.S.stock markets above the top with a low volatility, we wonder what could alter this situation of general optimism, with 10 years bond yields below 2% and high yield corporate bonds close to the lowest ever. The most significant data this week are perhaps the most significant ones of the month of April, at a macroeconomic level. It all begins on April 1st with the ISM manufacturing, April 2nd with factory orders, April 3rd with the ISM services and finally on April 5th with the unemployment data.
BCE AND BANK OF ENGLAND.
The coming week is based on expectations of what Draghi and the ECB will decide on interest rates, but also on issues about the monetary policy. The EurUsd graph clearly expresses the divergence between the evolution of the Fed balance sheet / ECB balance sheet ratio and the change. As we can see on the chart, both variables are related enough in the long run, but in some cases (i.e. the present one) they separate indicating market expectations far from the current reality. This means that the current change reflects new expansionary policies of the ECB, not yet formally counted in the financial statements. We would not be surprised then to see the ECB, on April 4th, cutting rates or launching a new cash injection like the LTRO, lowering the ratio Fed / ECB and realigning it to the EurUsd cross.
In terms of macroeconomic data, we are waiting for PMI manufacturing and unemployment on April 2nd. The inflation will be published on April 3rd,, the PMI services on April 4th and retail sales on April 5th. Also waiting for the meeting of the Bank of England scheduled for April 4th.
Many different macroeconomic information will come from emerging countries coming from the South African meeting which established the probable creation of a new alternative bank to the IMF. Also important is the agreement of trade with foreign exchange regulation in the respective local currencies, joined byBrazilandChina.
Here are the most important events from the economic point of view:
- South Africa: trade balance (March 28th )
- Brazil: PMI manufacturing, trade balance (April 1st ) – industrial production (April 2nd )
- Turkey: GDP (April 1st ) – Inflation (April 3rd )
- China: HSBC PMI Manufacturing (April 1st ) – HSBC PMI services (April 3rd )
- India: HSBC PMI manufacturing (April 1st ), inflation, trade balance – HSBC PMI services (April 3rd )
Also noteworthy, the appointment with the meeting of the Bank of Japan scheduled for April 5th and the important Japanese Tankan index scheduled on April 1st , that could cause volatility on the Yen.
Trade of the week: short EurNok
This month is seasonally favorable to the Australian dollar, but April is also the month of the Scandinavian currencies, with the Norwegian Krona that climbed up in 11 of the last 11 years against the Euro (10 of 11 against the Dollar) and the Swedish Krona strengthening in 15 of the past 19 years on the Euro. Although already started a movement of empowerment, this seasonality in favor of Nok will be exploited tactically to bet on a return of EurNok toward the 200-days moving average of 7.40 (see first chart), a situation that will be able to facilitate an output at the best prices from the Norwegian Krona itself. Especially against the Dollar in fact, the Norwegian Krona seems to be set to a backdrop of weakness in the medium term (see second chart).
The bullish engulfing pattern in the month of February seems to signal a perspective of strength for UsdNok that will formalize a bullish head and shoulder signal over the ratio at 6.00. This would permanently erode the bull market of the Norwegian Krona.