EURUSD – Weber turns up the heat

Alex Weber, chief of the German central bank didn’t want to distract markets from their expectations of as many as three hikes (actually three and a half are discounted by the fixed income market) in the euro zone this year during his speech yesterday. He said that a normalization in rates is warranted and thus denying such expectations wouldn’t make sense. Surely this is a hawkish statement, yet one needs to consider couple of points:

• More than three hikes are already priced in by the market; even three hikes seem to us like a radical scenario (especially given a sanguine stance of the Fed) and thus discounting more has no fundamental reasoning; so despite a statement from Weber the “rates” story has little upside in store for the euro
• Weber will be gone by the end of April and Trichet by the end of October; those who will replace them may not be so convinced that higher inflationary risk are worth the fight regardless of all the potential dangers
• Speaking of dangers, yields on the Portuguese bonds are making new highs nearly every day and the forex forgot about the debt crisis as of late – however rising yields coupled with large amounts of PIIGS’ debt maturing in the second quarter and a tough political search for new solutions may refresh those memories and this is an evident downside for the euro
• On the other hand, one shouldn’t underestimate a tendency of the market to overestimate things – if ECB is really bound to rise rates in April, markets may temporarily discount even an improbable scenarios; however this is the only chance for the euro-bulls on this list and even if the EURUSD continues to climb on this story any upside is limited (with Nov’10 1,4280 high as the most optimistic target)     

EURUSD – technically still up

The pair has declined for three days, reversing from the 61,8% Fibo expansion at 1,4037, yet selling signals are yet to be delivered – so far the pair took advantage of 1,3860 – a support provided by the high from early February. A key support is provided by the lower limit of the two-month upward channel – currently slightly above 1,38. Only breaking that level could trigger a larger decline.

Events to watch – German output, US fuel inventories, RBNZ

A calendar for this week is relatively light and Wednesday is no exception. Germany’s output data (6.00 ET, 12.00  CET, consensus +1,7% m/m) will not have a noticeable market impact and in US the key news is the data on fuel inventories (10.30 ET, 16.30 CET). Thursday’s Asian trade will be much more interesting though – rates are expected to be cut in New Zealand (as a consequence of earthquakes) and there will be a release of Australian labor market data (7.30 PM ET, 1.30 CET, consensus +21,5k) and the Chinese trade balance.   

Przemysław Kwiecień PhD, Chief Economist

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