EURUSD, 4/28/2013 - Uncle Ben vs Super Mario

This week's EURUSD trade will be all about the Fed vs the ECB in a one-two punch on Wednesday and Thursday respectively.  The pair seemed oddly directionless last week, given the chorus of rate cut telegraphs, trading mostly inside of about a 100 pip range and closing around 1.3030.

Recap
There were a number of news events that did little to move the pair around last week.  As stated, every major FX analyst or firm predicted a rate cut by the ECB following dismal German PMIs, specifically the services PMI, slowing to a contraction vs an expected marginal expansion.  Also, typically staunch German monetary hawks have been going public with dovish statements, specifically noting the recent disinflation in most PIs.

The other side of the pair had a similarly lackluster week.  The US real estate market looks to be cooling, the QoQ GDP print was solidly below the predicted 3% figure and the volatile monthly durable goods orders missed, showing a decrease of 5.8% vs an expected decrease of 2.8%.  This is an extension of the less than exciting macro data that's been printing in the last two weeks.  Mix this with lower than expected inflation via lower CPIs, and it looks like some cloudiness is forming around the Fed's QE tapering/halting forecast.

Outlook
Mon-Tue
Monday will have price indices in both the EZ and the US.  Tuesday will be German unemployment numbers.  Incidentally, most of Europe is closed Tuesday for Labor Day.  I'd expect the inflation indicators to continue show subdued inflation.   That said, these events will only be minor blips - the main events are the central bank meetings on Wednesday and Thursday.  I'd look to fade any move on reaction to these numbers unless there is a drastic miss.  Keep positions relatively small and be mindful of dealers moving the market around outside of the London and NY sessions.

Wed
The Federal Reserve's interest rate decision will be posted at 2pm EST, with the press conference scheduled for shortly thereafter.  We can be pretty assured that the interest rate target will not change.  However, Ben will surely be providing lots of clues as to where the FOMC is on QE.  Last month he talked up ratcheting down QE in light of the improving labor market .  However, since then we've seen slow job growth and (according to "official" government price indices) inflation reversing and nearly heading into deflation.  Since the Fed's dual mandate is on price stability and employment, I'm guessing this will be enough for Ben to give the green light on full $85 billion QE through the end of 2013.

Strategy (in order of probability):

1. In lieu of any major talk of extending QE, load up on the EUR short trade towards the conclusion of the conference.  Since everyone is expecting the ECB's rate cut on Thursday, an all clear on the USD will be the right time to sell EUR.  Be wary of selling anything over 1.32.
2. If Ben guides QE into 2014 with conviction, stay away from this trade and watch the market reaction post conference.  This could be the beginning of increased volatility in the pair, so best to wait it out and see what levels the market establishes
3. If Ben + committee commit to increasing QE and/or rule out any QE end dates, get ready to sell USD across the board.  Stay away from EUR, but buy anything with a decent yield that is not massively overbought already - I personally favor RUB, MXN, SEK and CAD.  Stay away from AUD as it is looking too risky given the marked slowdown in China and precious metals.
4. If the Fed comes out gangbusters talking up the dollar citing the massive risks monetary easing proves to the real economy, short GBP, EUR aggressively  and buy JPY in anticipation of a massive carry trade unwind.  Also, short mid-long term US treasuries.  Well, one can dream I suppose...

Thur
ECB rate decision at 7:45am EST followed by Draghi presser at 8:45am EST.  Assuming EURUSD is trading in the low 1.30s this is screaming for a short setup. I'm still not sure how to interpret last week's market non-reaction to all the rate cut telegraphing - could all market participants be missing the signal here?  Will follow up on the strategy for this event as the week unfolds.

Fri
Go sailing! (weather permitting)

German Exports

It seems to me the market discounted the German Export miss this morning at 2am EST.  If anything could throw German support (albeit behind closed doors) behind perceived looser policy it would be a threat to their prized export economy.  It seems this could open the door to more openness to "talking down" the currency.

The pair has come within 1 pip of 1.31, rallying strongly through the end of the London session.  Being cautious of tomorrow's FOMC minutes, I'm starting to get short EURUSD again in anticipation of a sub 1.30 weekly close.

BOJ Minutes Release

Feels like USDJPY will head up to 100 and bounce off that after the BOJ minutes release.  The minutes can only show that there is some trepidation by some on the bank's committee to the grand plan (god I hope so!).  Maybe back to 97.50 for a while.  Pure technical conjecture at this point, but I think we'll hit 100 before tonight's minutes are released.

EURUSD, 4/7/2013

Recap
The pair opened last week around 1.2800 and muddled around about a 50 pips north and south until the ECB meeting on Thursday.  The initial reaction to Draghi's somewhat dovish prepared statement was a headfake to the week's low at about 1.2740, but it then slowly crept back as Draghi answered questions and eventually skyrocketed for an impressive 210 pip reversal to close the day close to 1.2950.  Specific talking points that triggered upward movement:

• PIs show no risks to price stability
• discussion of the broken monetary transmission to peripheral SMEs and how further rate cuts would be ineffective at fixing this
• strong reaffirmation that the Cyprus bailout will not be a template
• strong reaffirmation that pundits/blogosphere underestimate the political capital invested in the EU and that a member exit is not considerable - "there is no plan B"

The upward movement continued to 1.3040 on Friday after the big US NFP miss, before settling to close the week slightly under 1.30.  This close brings the pair back to 75 pips of where it was trading prior to the Cyprus debacle.

Other interesting developments during the were a somewhat softening of the contraction in EZ PMIs (speaking very broadly here) and the plunge in Italian debt yields.  One cannot help but wonder about Draghi's role here given his tight-lippedness over his conversation with Italian PM Napolitano coupled with his continued efforts to keep OMT criteria vague (call me a conspiracy theorist I guess).

Outlook
The market's QE ending and long dollar index sentiment looks to be under fire given last Friday's alarming NFP number.  The market will be on edge for any signs of slowing economic news/data out of the US.  I favor going long other pairs vs USD.  I will however get long EURUSD on a short term basis.

Mon
The risks from Portugal's weekend repeal of austerity measures seems muted so far.  There was a minor gap on the Asia open that has since been filled.  Will have to continue to monitor this, but it again opens up the downside risk possibilities, so I want to keep any long positions on a short leash.

Light data day.  EZ investor confidence and German industrial production.  Expectations are already low.  No US data releases.  Bernanke will speak at 7:15pm EST.  My feeling is that any of the EZ data coming in even slightly better than expected will push the pair higher toward 1.31, whereas inline data and slightly worse data shouldn't have much affect given the ECB's last meeting.

Tue
Another light data day.  Trade balance data for Germany and France.  US Redbook Index.  Barring anything major out of Europe, we could see a continuation upwards of the EUR here.  Continue to keep long positions tight.

Wed
One of the week's big USD events will be the relase of the FOMC minutes on Wednesday at 2:00pm EST.

<more details to come Monday>