Spring Trends - Fresh, Traditional, and Dangerous

Strong purchases made German papers attractive to other investors, and, first of all, to the Japanese (EUR/JPY grew by 4%)
It was not the weak US report or weak-willed Japanese policy that were the main drivers of the week, it was not even bleak FOMC comments, but rather a panic on the German bonds market. Pairs with EUR showed the biggest growth, but it was not because of a large volume of bearish positions, it was due to German 10-year papers yield growth, which grew more than twice for a week. European investors, afraid of high prices for German papers, arranged for their massive dump.

Causes of these events

  1. Purposeful verbal speculations made by a number of large investors and profit taking with regard to successful speculative positions against the QE background. How do analysts think? Most overlay DAX chart and USD index chart over the growing EUR/USD chart, they see traditional correlations - but in reality, they have an opposite picture. Logically, if assets nominated in a certain currency are in demand, then this currency must be purchased. However, this connection is violated today.
  2. Huge amounts of cash accumulations both in euro and in yen, and in dollar, on both sides of the Atlantic because of incredible volumes of quantitative easing that central banks are addicted to. Technically: the currency market could not ignore the volume of euro released from German assets, and euro was supposed to collapse. However, euros that left DAX were purchaed very quickly.
  3. Additional incentives:
    • A part of this mass sank into cash again, and while nobody is ready to invest available funds into another market, the currency market must be quiet, at least. The current activity with regard to euro is stipulated only by working out of rumors and expectations;
    • A part of money went to the stock market: the yield is high, European indexes are going upward, and money can be earned on that;
    • Quite large amounts are spent by players for speculative purchase of German papers;
    • A certain amount is purposefully spent on supporting QE programs for the growth of financing and increase of inflation;
    • The remaining amounts of newly printed euro are poured into USD, JPY and CHF.
A bleary thought arises that a strong financial lobby for "curtailing" euro-QE is awakening somewhere on euro-backstage, and this information is leaked in portions to someone in narrow financial circles. As the result, we are having not technical and not quite understandable to small players market behavior.

Strong purchases made German papers attractive to other investors, and, first of all, to the Japanese (EUR/JPY grew by 4%). It is possible that this is a long-term turnaround, but the further growth of profitability if problematic because of euro-QE pressure. It will hardly go below 0.05%, however, it will not rise above 0.4%. Analysts' new mistake - USA GDP data, although the weak first quarter of this year has long been traditional (three of the last five years). As always, attempts were made to ensure growth at the expense of spendings for personal consumption and increase of private sector reserves; however, reduction of exports and decrease of state spendings have neutralized all the positive. The growth of reserves can be regarded as an indirect sign of overproduction and continuation of deflation. Judging by the FOMC comments, this is a temporary weakness that is not worthy of serious attention. The market has drastically adjusted its expectations with regard to the dates of FRS rates increase - until this December. American data regarding applications for unemployment benefits turned out to be below expectations, which gives a hope for positive NFP.

In Greece, a new reshuffle is observed: if it was reported previously that a preliminary agreement with regard to writing off large amounts of the state debt for obtaining a new IMF loan can be reached in the nearest several days, then there are talks now about the end of May - beginning of June. In the nearest two weeks, GBP has the biggest potential of decline against dollar; taking into consideration the growth of GBP/USD pair for April by 3.6%, active sales of GBP against EUR and the uncertainty of the upcoming 7 May election. The growth of EUR is limited by growth in cross-pairs. Strong mid-term resistances: EUR/AUD: 1.4298 – 1.4369, EUR/GBP: 0.7410, EUR/CAD: 1.3657, EUR/JPY: in the area of 135 mark. With regard to EUR/USD, the price will try to stay above 1.1140 mark. Active attempts are made to turn attention to 1.1200 level, its penetration is quite possible. Benchmarks are relevant until the end of this eventful week. Pressure on euro is retained; however, it is not impossible that the movement of the main currency will be triggered by the events outside of Eurozone.

Author: Navsher Bartash,
ForexChief Currency strategist