Morning Call 11-02-2020


A chain of better data last week has improved the outlook for USD like a super-strong NFP reading which came in at 225k vs 163k expected, while sentiment surveys have tended to surprise to the upside. This can improve even further as this week we have retail sales and CPI. With more bad news related to coronavirus hitting the headlines, the demand for USD will continue as it holds a safe heaven status.

Measures of returning workers and passenger traffic flows within China suggested the virus had “a devastating impact on China’s economy in January and February,” said analysts at Nomura in a research note.

“The coronavirus hitting has money going into the U.S. dollar,” said Westpac FX analyst Imre Speizer in a Reuters report. “You’ve seen a good run of economic data in the U.S., that’s been another support.”

This week all eyes on Powell testimony to congress, today and tomorrow. Have in mind that the FED made clear its intentions to remain cautious and ready for a possible emergency regarding interest rates. So, don’t try to sell USD.

Not to mention that we had a COT Buy signal last week for USD.

EUR – I see you in Valhalla

There is no doubt that the dollar appreciation is weighting on EUR, but the dovish comments from ECB’s Lagarde who warned markets not to assume that ECB policy will be on auto-pilot this year are putting even more pressure on the already fragile currency. One more attent member may argue that we have a raft of better data coming from Europe

  1. Manufacturing PMI
  2. Sentix economic index
  3.  ECB’s inflation target year-on-year headline rate double 0.7% -> 1.4%

On the bad side, the headwinds  that make me believe things can get worse before better:

Q4 2019 GBP was the weakest quarter GDP Growth in the euro area since Q1 2013

  1. Recession risks around Germany
  2. The economies of France (-0.1%)
  3. German industrial production dropped by 6.8% (YoY)
  4.  Chinese demand for European product may falter (CoronaVirus)
  5. Trade war – Trump focus changing from China to Europe
  6. Brexit – Risk of Trade with the UK will be conducted on WTO terms

While there are green shoots in Euro-area survey data, hard data has remained weak. German industrial production crashed in December, and while things ought to be looking up in 2020 – so far hard data aren’t playing ball. According to the ECB’s usual policy pattern, substantial improvements to PMI/etc are needed to bring about any tightening/hawkish repricing whatsoever. With no big hard data rebound in sight the ECB probably won’t normalise anytime soon – keeping the EUR a funding currency.  Source: Nordea

Do not buy EUR. Also of interest will be a speech by European Central Bank President Christine Lagarde at 09:00 AM ET (1400 GMT).

GBP – Burning Phoenix

Today we saw a positive GDP print, that is giving a temporary boost to cable, the trade negotiations, the tricky negotiations, with EU will continue to blow a strong headwind on sterling. On Monday, U.K. cabinet minister Michael Gove confirmed in a speech that there will be new checks and other frictions at the U.K.’s borders.

One thing that is important to have in mind is a one-off fall in the pound might cushion the blow for exporters and as BoJo has consistently said he won’t seek an extension to agree to a new trade deal with the EU, so a clear break at end year delivers on Mr. Johnson’s key election promise while also maximizing the time between the problems it will cause and the next election in 2024. The pound is cheap? Yes, but it can get cheaper.

We also saw in yesterday’s forex weekly report that the pattern for pound is bearish! So, let’s keep the strategy of selling the rallies.


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