March 28, 2013

In Cyprus, with doors opened wide

The banks there now brace for the tide

Of people who need

More cash just to feed

Their families who’ve suffered and sighed

G3 – It has been a pretty uneventful session despite the reopening of the Cypriot banks this morning, or perhaps because of that.  The euro has rebounded slightly from yesterday’s levels which appears more to be driven by short covering into the Easter holiday weekend than any fundamental story.  In fact the data from Europe was somewhat mixed, with German Unemployment climbing slightly, by 13K, while Retail Sales there were up 0.4% (exp -0.6%).  So some good news and some bad news left traders to their own devices ahead of the US data onslaught.  We continue to hear about the nature of the capital restrictions in Cyprus, which are both fairly draconian and uncertain as to their tenor.  The initial word is that they should only be in place for one week, but it seems likely that they will be extended.  Because it seems pretty clear that once they are lifted, all foreign depositors will be exiting the country with whatever they can carry.  While I continue to believe the prospects for the euro are looking worse, given the nature of the move we have seen the past several sessions, it is no surprise to see a little buoyancy in the currency this morning.  If I were a receivables hedger, I would look to take advantage of euros above 1.2800.

Governor Kuroda was back testifying last night, this time to the Upper House of the Diet, and said the same thing he has been saying, the BOJ will do “whatever it takes” to achieve the mandated 2% inflation target and his timeline remains two years.  This includes expanding and extending the current QE program and they are willing to consider other measures as well.  However, the market has heard this story before and market reaction was muted. We continue to see yen repatriation by Japanese exporters, but as tonight is year end for most companies there, I expect that flow will stop shortly.  A weaker yen remains in our future, remember that.

The pound has been the least interesting of the big 3 currencies this morning with modest reaction to slightly weaker than expected Housing price data, and no interest from the asset allocators who are back to fleeing the euro.  Until we see a change in either the economic situation in the UK or a better economic outcome on the continent, neither of which seems a likely near term occurrence, it will be tough for the pound to rebound past recent highs.  In fact, I expect that we will see a move back toward 1.50 and below over the coming weeks.

US data today showed GDP revised up to 0.4% (exp 0.5%), and Initial Claims jumping to 357K (exp 340K), but the market response has been lacking.  We get Chicago PMI later this morning, (exp 56.5) but quite frankly with the holiday upon us (tomorrow is both a bond market and stock market holiday), it is hard to believe that we will get much movement later today.  Look for a quiet one.


CommCurr – Aussie has been under a bit of pressure this morning as it appears we are seeing short term traders liquidate their recent long positions.  Remember, Aussie has been outperforming for a while, and as we head into the long holiday weekend, with both Friday and Monday a holiday in many countries, lots of traders are looking to close things for the weekend.  CAD, on the other hand has had pretty decent performance, which many observers are calling a response to the strength in energy prices we have seen the past several sessions.  While that certainly had an impact, I continue to believe that the bulk of recent CAD strength was merely a reaction to its former relative weakness.  I have liked CAD all year, never understanding the recent move toward 1.0350, and perhaps my longer term views are starting to bear fruit now.  I don’t see a reason for CAD to go anywhere near 1.05, especially with the energy complex performing well, and so CAD payables hedgers should be considering the benefits of adding to positions here.


EMG – Asia saw a bit of a whipsaw in price action, what with North Korea cutting its final communication lines to the South and China imposing further controls on lending for second homes and other banking activities.  But given the broad dispersion of positions in this space, there is not likely to be a concerted move in one direction across the board.  In LATAM, the central bank of Brazil was active yesterday, selling more than $1 billion into the market and knocking spot back about 1%.  That movement has continued at the margin this morning, but unless they return, and that is not expected, I would think that 2.00 is going to hold for a while longer yet.  MXN, meanwhile, is rebounding from its recent peak, but again, this appears to be positional rather than fundamental.  Long MXN remains one of the favored trades in the market these days, and it has been performing well, so any bounce right now in USDMXN is likely to be short lived and shallow.  For receivables hedgers, leaving bids at comfortable levels seems the best game plan. For payables hedgers take advantage of any rallies in the dollar for now as they are likely to be fairly short term.


Good luck