FX Primus Ltd.

FX Primus Ltd.

April 30, 2013 06:14 ET

Market Brief of the Week-European Central Bank in the Spotlight: Mario Sant Singh

'Sell in May and run away?'

SINGAPORE, SINGAPORE--(Marketwired - April 30, 2013) - In his Market Brief of The Week for 29 April, leading global foreign exchange trader, educator and author Mario Sant Singh - whose views are widely sought after in the Forex industry, focuses on the Q2 deterioration in confidence with the 10-year U.S. Treasury bill yield reaching its lowest level in 2013, and a possible ECB benchmark interest rate cut on the table.

Key Events to Focus On This Week

  • U.S. Conference Board (CB) Consumer Confidence Index
  • China's Manufacturing Purchasing Managers' Index (PMI)
  • UK Manufacturing PMI
  • Institute for Supply Management (ISM) Manufacturing PMI
  • Federal Open Market Committee (FOMC) Statement
  • ECB Refi-rate and Press Conference
  • U.S. Trade Balance
  • U.S. Non-Farm Payroll (NFP) and Unemployment Rate
  • Spanish Flash Gross Domestic Product (GDP)
  • German & Euro Area labor data

Key Events Last Week

  • China's HSBC Flash Manufacturing PMI missed forecast, from 51.6 to 50.5
  • German Manufacturing PMI lowered to 47.9 from 49
  • Reserve Bank of New Zealand (RBNZ) kept Official Cash Rate (OCR) at 2.5% unchanged, tone shifted from dovish to neutral
  • German Ifo decreased to 104.4 from earlier 106.7
  • UK GDP beat forecast, hitting 0.3% QoQ
  • U.S. GDP missed forecast in 1Q, staying at 2.5% QoQ
  • No surprise from Bank of Japan (BoJ)

Economic Insights

Global Macro Update - We are finally in May

Recent global economic releases and confidence started deteriorating since the beginning of 2Q, putting the concern of "sell in May and run away" on the table. However, pricing has yet to reflect worries since volatility remains low.

To view Figure 1, please visit the following link: http://media3.marketwire.com/docs/fig1fxpr.jpg

Source: Bloomberg, FXPRIMUS

Thus, major currencies continue lacking correlation against the USD. Their respective fundamentals chose their direction so far:

To view Figure 2, please visit the following link: http://media3.marketwire.com/docs/fig2fxpr.jpg

Source: Bloomberg, FXPRIMUS

  1. Lower Consumer Price Index (CPI) in Japan challenged the Bank of Japan's (BoJ) credibility, the Yen surged.
  2. Upbeat UK Gross Domestic Product (GDP) pushed its currency higher.
  3. The CAD strengthened on the crude price rally last week.
  4. The Euro lowered on the ECB's rate cut fears.

The 10-year U.S. Treasury bill yield reached its lowest level in 2013. Will it be an indicator of "risk off" moving forward?

To view Figure 3, please visit the following link: http://media3.marketwire.com/docs/fig3fxpr.jpg

Source: Bloomberg, FXPRIMUS

  1. Weak U.S. data, including 1Q GDP, attracted fund inflow from equities.
  2. Coupon action size may get cut on the shrinking federal budget deficit.

ECB will likely cut interest rate for first time this year

Draghi's previous statement and hope from earlier this year might be taken back.

Mario Draghi made a few statements earlier this year that the economy is expected to recover gradually throughout the year, and a rate cut would be on the table for the time being. The recent financial condition in the Euro Zone might suggest the need for further easing measures.

To view Figure 4, please visit the following link: http://media3.marketwire.com/docs/fig4fxpr.jpg

Source: Bloomberg, FXPRIMUS

The worst-case scenario: Core economy affected by peripherals, such as Germany and France, slowing down.

The German Manufacturing Purchasing Managers' Index (PMI) and lower Business & Economic Sentiment Index indicated that the economy could possibly enter into a technical recession.

To view Figure 5, please visit the following link: http://media3.marketwire.com/docs/fig5fxpr.jpg

Source: Bloomberg, FXPRIMUS

Thus, pro-growth partisans could use the core economies' slow-down to undertake less fiscal consolidations and more pro-growth policies. However, the peripherals' yield turns lower sharply.

To view Figure 6, please visit the following link: http://media3.marketwire.com/docs/fig6fxpr.jpg

Source: Bloomberg, FXPRIMUS

With that said, no action from the ECB this week will spur recent lowering borrowing costs.

ECB event risk will be extremely high this week.

Around two-thirds of economists project a 25 bps cut for the ECB benchmark interest rate. In addition, investors expect the central bank to take measures to boost small- and medium-enterprise (SME) lending since it could be difficult for the rate cut to make much difference. We need to take reference on the UK's Funding for Lending Scheme (FLS).

More credit measures in the UK will target SMEs since M4 growth is still negative, although showing improvement.

To view Figure 7, please visit the following link: http://media3.marketwire.com/docs/fig7fxpr.jpg

Source: Bloomberg, FXPRIMUS

Last week, banks in the UK were encouraged to lend more by a few new measures:

  1. The FLS is extended to another year to January 2015.
  2. Incentives increased by lending to SMEs, such as 10X multiple funding access in 2013, and 5X in 2014.
  3. Access to the FLS is extended to the non-banking credit group.

A rate cut just meets expectation; credit boosting measures are extra bullets.

  • The ECB lending survey to businesses released last week suggests deteriorating funding access for corporate companies.

To view Figure 8, please visit the following link: http://media3.marketwire.com/docs/fig8fxpr.jpg

Source: Bloomberg

  • Inflation is at 1.7% YoY, below the ECB's target at 2%, which supports the central bank to act more.

To view Figure 9, please visit the following link: http://media3.marketwire.com/docs/fig9fxpr.jpg

Source: Bloomberg, FXPRIMUS

  • Due to the "do whatever it takes" similarity between the ECB and BoJ, when the BoJ excises aggressive tools to get out of deflation, non-action from the ECB will reduce credibility for themselves.

U.S. - Ongoing debates on recovery

U.S. 1Q GDP misses forecast with no excuses.

It marked sharp improvement for the 1Q growth pace, but was 0.5% lower than the mean forecast.

To view Figure 10, please visit the following link: http://media3.marketwire.com/docs/fig10fxpr.jpg

Source: Bloomberg, FXPRIMUS

A brief breakdown of the U.S. 1Q GDP:

  • Government spending contracted 4.1% annualized, led by a 11.5% defense-spending cut.
  • The main contribution was from consumer spending, marking a 3.2% growth from the 1.8% in 4Q 2012, the best quarter since late 2010.

Recent fading economic releases such as the Non-Farm Payroll (NFP), Institute for Supply Management (ISM), Consumer Confidence, together with the sequestration kicking in, 2Q growth is expected to be more modest.

This week - ISM, FOMC, and NFP will dominate.

ISM at below 51 is very likely.

U.S. manufacturing activities show less resilience after a three-month boom. For April, the Empire State Manufacturing Index and the Philly Fed survey continue shrinking, which means the ISM index will likely be below the 51 level this month from the latest 51.3.

To view Figure 11, please visit the following link: http://media3.marketwire.com/docs/fig11fxpr.jpg

Source: Bloomberg, FXPRIMUS

Federal Open Market Committee (FOMC) - Weaker data puts stimulus withdrawal off the table for the time being. Meanwhile, no major policies are expected to change from the previous statement.

The Federal Reserve (Fed) made it clear that the main purposes of Quantitative Easing (QE) target the labor market and price stabilities.

To view Figure 12, please visit the following link: http://media3.marketwire.com/docs/fig12fxpr.jpg

Source: Bloomberg, FXPRIMUS

  • Some hawkish members might have fewer reasons backing their views by the weak labor report in March; some of them predicted stronger incoming data in the March meeting.

NFP could return to a three-digit gain this month, given less initial claims.

  • Claims seemed volatile in recent months due to the seasonal adjustment for the Easter holidays. However, April claims are stabilized compared to March.

To view Figure 13, please visit the following link: http://media3.marketwire.com/docs/fig13fxpr.jpg

Source: Bloomberg, FXPRIMUS

Worse economic releases, financial conditions deteriorating, and government spending cuts will cap the labor market under pressure.

To view Figure 14, please visit the following link: http://media3.marketwire.com/docs/fig14fxpr.jpg

Source: Bloomberg, FXPRIMUS

Economic releases and policy directions could bolster the Gold price this week.

To view Figure 15, please visit the following link: http://media3.marketwire.com/docs/fig15fxpr.jpg


Mario Singh is the Director of Training & Education at global retail Forex brokerage FXPRIMUS. He has appeared as a guest expert on CNBC more than 35 times to talk about foreign exchange markets, and is a regular contributor to top investment publications and online portals. Known as a brilliant and intense communicator with a unique ability to 'keep Forex simple' and a mission to help every man-in-the-street to trade profitably and responsibly in the Forex market, more than 20,000 people have attended his Forex trading programs. He is the only Forex trader in Asia invited to train Julius Baer Private Bankers - the third largest Swiss Bank, and ICBC, China's largest commercial bank. Mario is also author of the best-selling book, 17 Proven Currency Trading Strategies: How to Profit in the Forex Market. (Wiley Publishing).


FXPRIMUS offers retail traders a level of trade execution, service quality and fund safety that are normally reserved only for the largest investors. Serving traders in 205 countries across 6 continents FXPRIMUS combines an unmatched level of fund safety with regular independent audits of company financials and Straight Through Processing, top notch execution with tight spreads, prompt and responsive customer support, ISO 27001 certification in Information Security and an industry-leading trader toolset that includes free access to powerful trader tools and personal coaching via FXPRIMUS Coach FXPRIMUS truly is The Safest Place To Trade.

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