Soft economic data from the US and Eurozone, as well as lingering uncertainty about Cyprus’ banks and Italy’s political gridlock have combined to weigh on stocks and currencies in what appears to be a classic “risk-off” shift.
With US stocks opening lower and European equities under significant pressure, the selloff in currencies is consistent with a return of risk aversion. The weakness this morning was kicked off by softer Eurozone data, which shouldn't surprise readers since we warned here earlier that the Italian elections in February and Cyprus problems would weigh on sentiment.
See also: The New Epicenter for Eurozone Problems
This morning's US economic report also failed to ease the pain, with pending home sales dropping 0.4% in the month of February after rising a downwardly revised 3.8% the previous month. While January was a very good month for the US housing market, existing, new, and pending home sales all gave back some gains in February.
Both the US dollar (USD) and the Japanese yen (JPY) have been big beneficiaries of the shift in risk appetite. Looking ahead, if we don't get any good news from Thursday's German retail sales and unemployment numbers, the EURUSD could find itself trading below 1.27.
Meanwhile, the market is still talking about Cyprus and whether it will be a template for future bailouts. Based on the big moves in German bonds, it is clear that investors in Europe are turning to the bonds of the strongest Eurozone economy for safety. As a result, ten-year German bund yields are trading at the lowest level since August.
4 Federal Reserve Speeches on Tap Today
We don't expect much recovery in currencies during the North American session. Four Federal Reserve Presidents are scheduled to speak today, though only one is a Federal Open Market Committee (FOMC) voter.
Between Fed Presidents Eric Rosengren (Boston), Sandra Pianalto (Cleveland), Simon Potter (VP, New York), and Narayana Kocherlakota (Minneapolis), Rosengren's comments will carry the most weight, and he is usually dovish, so don't be surprised if he echoes recent comments from New York Fed President William Dudley, who called on the Fed to keep monetary policy "very accommodative."
Canadian Dollar Achieves New Recent High
Finally, the Canadian dollar (CAD) reversed its earlier gains after hotter-than-expected consumer prices. Canadian CPI jumped 1.2% in the month of February, which was the strongest increase since 1982. Annualized price growth increased by the same amount, while seasonally adjusted prices rose by a more modest 0.4%.
For the Bank of Canada, higher inflationary pressures will further encourage the Bank’s hawkish bias. Between the recent rise in oil prices and stronger data, the CAD has now risen to a one-month high against the US dollar.
By Kathy Lien of BK Asset Management