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MARKET STRATEGY DAILY Overnight News  

Tuesday, 18 February 2014

Nikkei rises, yen falls as BoJ boosts special loan schemes RBA minutes reiterate a period of stable rates – AUD no longer uncomfortably high

FOREIGN EXCHANGE  

UK CPI the focus - data risks balanced but corrective bias in GBP EUR remains well supported – ZEW and current account data to emphasise upside risk. -

USD

Yesterday’s US holiday unsurprisingly saw little net change in the USD, but despite the return of the US the USD’s drivers still look more likely to come from elsewhere. The Empire survey will be of some interest today, but lots of weather uncertainty in the US suggests developments in the UK and Eurozone could still the bigger drivers for the USD index. The index has found some support at the 80 level, and this should prove difficult to break, but we are a bit concerned that the EUR strength could trigger further USD index losses near term.

GBP

UK CPI will be the prime focus today, but shouldn’t really have a major impact on GBP, as monthly fluctuations in CPI are unlikely to significantly affect policy. Tomorrow’s labour market data will be seen as more important, but the fact that BoE chief economist Spencer Dale said that the market’s response to the latest data and BoE policy statements was “reasonable” suggests GBP is well supported near current levels. Nevertheless, after making a new high early on Monday the tone has turned corrective and this bias may well continue through today if the CPI data disappoints. Initial support for GBP/USD and resistance for EUR/GBP is near current levels, but a break below 1.6680 and above 0.8210 would open potential for another 0.5% GBP decline.

EUR

The EUR continues to outperform most expectations, and even though the data remains substantially weaker than UK or US data, the case for further EUR strength remains because of the natural flow into the EUR underlined by the current account surplus, the latest data on which is reported today. This flow is more important when speculative activity is moderate and natural flow is dominant, so the EUR18bn or so a month that flows into the Eurozone current account becomes relatively more significant. Over the long run, movements in the current account and the basic balance of the Eurozone do have a consistent impact, and currently still suggest some upside risks for the EUR (see chart on page 2). The ZEW data today should also be EUR supportive. 1.3740 looks like major resistance in EUR/USD, but we would still expect the EUR to retain a firm bias.

SEK

Swedish CPI will be a focus this morning, with the very low level of Swedish inflation continuing to highlight the lack of any pressure for the Riksbank to tighten policy. With the market pricing a rate hike within a year, and the Riksbank indicating a rate rise of more than 1.25% over the next two years, any continuing weakness in CPI would suggest further downside risk for the SEK, as the monetary policy path still looks a little ambitious given growth and inflation forecasts and the expectations for rates elsewhere.

INTEREST RATES  

Empire manufacturing to provide further evidence on the weather impact; could see sizeable correction German ZEW to potential to surprise on the upside; prefer USTs to Bunds today

With yesterday’s market action already forgotten the calendar today is richer at both side of the pond. In the US the Empire manufacturing should carry more weight than usual (it is the first purely manufacturing survey released for February) as the market seeks further evidence on the weather being completely responsible for the recent data fade. January’s print surprised positively but the risk this time lies with a much softer result that will only displease the bond bears. Coupled with the NAHB housing market index (30 year mortgage rate remains below recent highs), today’s data could push 10 year UST well below 2.7% yield – also assisted by mixed performance in Asian equities overnight due to the PBOC liquidity drainage. Putting aside today’s activity, the market has another 2 weeks’ time to evaluate the incoming data and form expectations for the February non-farm payroll print and hence the FOMC’s reaction; however there is a (small but present) risk that the scale of the improvement widely anticipated in data could not materialize and really put the next FOMC steps in doubt, justifying the current market pricing. In the Euro, the ‘Mediterranean club’ is under scrutiny. The smooth transfer of the premiership from Letta to Renzi is proving beneficial for BTPs. Renzi will meet the parliamentary party leaders over the coming days and there is a (worrying?) certainty that he will gain support to form a new government. Friday’s stable outlook from Moody’s also helped but there is still disbelief about economy outlook (See Fitch announcement). The outlook gap between Spain and Italy remains vast justifying their current spread. While we are positive on Renzi’s vigorous attempt, he must deliver results soon. In the meantime, Greece will gain more airtime going forward as Troika is returning the ultimate goal being at least €8.8bn (from the €14.6bn currently outstanding) to be disbursed in time for the May redemptions; Europeans policy makers are unlikely to voluntarily reignite the crisis but European parliamentary elections and the threat from far right / far left parties makes their moves more conservative. Regarding today’s calendar the German ZEW survey stands out. Despite the fact that ZEW has low correlation with the more influential IFO survey (released on 24th) another improvement today should support further intra-Euro tightening and provide more ammunition against the expected accommodation by the ECB. Praet, Linde and Liikanen will be on the wires again although are looking to hear from Buba’s Weidmann after the monthly report opened the door to unsterilized SMP. Overall, the market has been ignoring the positive surveys recently however another upside surprise will be enough for a daily tightening move in the 10 year UST-Bund spread.

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MARKET STRATEGY DAILY Time

Risk

Tuesday, 18 February 2014

Median

Last

FX view 8am-close London

Sweden CPI (Jan y/y)

09:00

0.1%

0.1%

EURUSD

Neutral

Sweden CPIF (Jan y/y)

08:30

0.7%

0.8%

GBPUSD

Neutral

Norway trade balance (Jan)

09:00

33.4bn

EURGBP

Neutral

Italy trade balance (Jan)

09:00

3091mn

USDJPY

Neutral

Eurozone current account (Dec sa)

09:00

23.5bn

AUDUSD

Neutral

3000mn

UK CPI (Jan y/y)

09:30

2.0%

2.0%

UK PPI output (Jan m/m)

09:30

0.0%

0.0%

UK PPI input (Jan m/m)

09:30

-0.4%

0.1%

UK ONS house price (Dec y/y)

09:30

6.0%

5.4%

Germany ZEW current situation (Feb)

10:00

44.0

41.2

Germany ZEW expectations (Feb)

10:00

61.5

61.7

US Empire manufacturing (Feb)

13:30

9.00

12.51

US TIC net long term flows (Dec)

14:00

30.0bn

29.3bn

US NAHB housing market index (Feb)

15:00

56

56

Euro Area Finance Ministers meet (08:00). Speakers:-ECB’s Praet (10:20); ECB’s Linde (11:00); ECB’s Liikanen (15:30).

15 Day FX correlations Government Bond Auctions

2 yr spread

S&P

CRB

UK

None scheduled

EUR USD GBP USD

36% 87%

60% 83%

69% 67%

US

Fed buys $3.75-4.5bn of UST Nov-2018 to Nov-2019

USD JPY EUR GBP

53% 94%

20% -75%

25% -42%

EA

DSTA offers the new 30 year DSL 2.75% Jan-2047

AUD USD EUR CHF

-25% 14%

39% -24%

87% 22%

EUR SEK

-41%

-4%

-4%

USD CAD

95%

-58%

-96%

CHARTS OF THE DAY Chart 1 : EUR TWI and Eurozone basic balance

EUR TWI % y/y (lhs)

Chart 2: GER 2s5s30s remains out of line with ZEW surveys

15%

0.0%

0% -5% -10% -15% 2002

2004

2006

2008

2010

2012

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-20

15 -40

-0.5%

-5

-1.0%

-25

-1.5%

-45

-2.0%

-65 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12

2014

Source: LBCB, Bloomberg

Charles Diebel Head of Market Strategy T: +44 (0)207 158 8281 E: charles.diebel@lloydsbanking.com

0

35

0.5%

5%

2-5-30yr (RHS)

55

1.0%

10%

ZEW expectations

75

1.5%

20%

-20% 2000

95

Basic Balance 12m MA % GDP (rhs)

-60 -80

Source: LBCB, Bloomberg

Adrian Schmidt FX Strategist T: +44 (0)207 158 8282 E: Adrian.schmidt@lloydsbanking.com

Jennifer Hau FX Strategist T: +44 (0)208 975 5014 E: Jennifer.hau@lloydsbanking.com

Vatsala Datta Interest Rates Strategist T: +44 (0) 20 8975 5004 E: vatsala.datta@lloydsbanking.com


MARKET STRATEGY DAILY Eric Wand Interest Rates Strategist T: +44 (0)207 158 8231 E: eric.wand@lloydsbanking.com

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Alessandro Mercuri Interest Rates Strategist T: +44 (0)207 158 8236 E: alessandro.mercuri@lloydsbanking.com

Tuesday, 18 February 2014

Achilleas Georgolopoulos Interest Rates Strategist T: +44 (0)207 158 8248 E: achilleas.georgolopoulos@lloydsbanking.com


MARKET STRATEGY DAILY

Tuesday, 18 February 2014

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