European Currencies to Suffer Disproportionately vs. US Dollar
The following is a post by Marc Chandler, head of Brown Brother Harriman’s Currency Strategy Team. For more of BBH’s currency views, visit the website here.
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We still favor buying the US dollar on the dips. Jitters over the Greek situation persist and concerns over growth remain ahead of a busy week on the US economic release front & following some disappointment last week. We expect the European currencies to suffer disproportionately to the other major currencies given these developments and note that the technical picture has deteriorated. The 50 and 200 day moving averages for the pound and euro have crossed to the downside and the Swiss averages should cross imminently.
Four major CBs meet this week (ECB, BoE, BoC and RBA) and the biggest risk for the currencies lies with the RBA decision. While the market is split 50/50 on a possible RBA hike, we think the odds of a rate hike are higher (70%) given the improvement in Q110 data (as opposed to data for Q4.) The Australian dollar is under pressure, particularly against the crosses but the risk is that the AUD reverses course on a surprise hike.
The Japanese yen was the top performing currency in the week ended Feb 28 and is likely to remain firm amidst Japanese repatriation ahead of the fiscal year-end in March.
US manufacturing ISM may boost payroll expectations (current market consensus at -30k for the Feb NFP data). Fed Beige Book to be consistent with Bernanke’s testimony and likely to confirm that the CB is in no rush to hike interest rates.
G20 deputy finance ministers and central bankers meet for the first time this year, to set the agenda for the June head of states meeting. No joint statement is likely but there may be some useful information concerning issues and country positions. Exit strategies and sustainable growth are on the agenda.
Short-term trading recommendations:
Buy the AUD vs. the USD
The Australian dollar is giving up some of its recent gains but we see a risk is that the RBA hikes rates Mar 2. Look to buy the AUD around 0.8770 which would be the 61.8% retracement of the AUD rally from early Feb to Feb 23rd. Place a stop below the 200-day moving average (currently around 0.8670) with an initial objective around 8865 with a longer term objective around the 0.9040/70 area (where 61.8% retracement of the AUD fall from mid-Jan and 100-day moving average come in.)
Buy NOK vs. SEK; Place Stop Below 61.8% Retracement
We still favor the Norwegian krone against the Swedish krone. As we noted last week, the Swedish krona has posted firm gains against the Norwegian krone since setting a double top in mid-January. The Riksbank’s decision at the Feb 11 meeting to bring forward the timing of the first rate hike, has been reinforced this week by better than expected data curbing a limited attempt to take NOK higher vs. the SEK. However, with the market over-extended and heavily positioned in favor of the SEK, a small piece of news could trigger a reversal including the Swedish Q4 GDP (due Mar 1.) The cross is testing the 1.2100 area (50.0% retracement of the cross’s rally from Sept 09 to the double peak in mid-Dec and mid-Jan.) Relative strength indicators are also diverging and pointing to a correction higher. Look to buy the cross around current levels (1.2100 and/or hold onto positions established last week around 1.2150) with a stop below 1.1996 (61.8% retracement of the rally from Sep09). A move back above 1.2230 area opens a move to 1.2350 with a longer term objective near 1.25.
Stay short GBP vs. CAD but tighten stop again
GBP has reached the 1.6000 objective against CAD and we expect a correction higher. We still expect UK political concerns (hung parliament a risk and would make it more difficult to take necessary steps to reduce the deficit) to remain a negative for the pound while Canada’s relatively strong fiscal position and its closer proximity to the US are positives for CAD. We recommend squaring with a break above the 1.6350 area leading to a correction back toward $1.6700 (near 50% retracement of pound’s fall from late Jan) which would provide a new selling opportunity.
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