A hung parliament in the UK is now more than just a probability with some strange alliances in the making.

There is also the ‘growth club’ as identified and ratified again in the last few days by the IMF of which the membership is still the US and the UK, Lagarde giving the UK premier a big pat on the back just in time for the elections.

IMF Prophecy

Once again the IMF report was full of gloomy warnings, dramatically referring both to Churchill and Kennedy, Lagarde stated    ”the bottom line is that risks to global financial stability are rising. The new mediocre growth environments not a comfortable place with respect financial stability’’

The fear is of economic stagnation and that alone can impinge deeply on the fragile recovery in the US and the more fragile still, in the UK if recent data is anything go by.

FOMC Confusion

The minutes released last Wednesday have revealed three layers of possibilities for the rate increase; June, still unlikely as this is still a minority view but sure to bring some buoyancy via the speculators, September and another minority group more fixed on inflation concerns that would prefer to wait for 2010.

This how it looks. The doves concern themselves with falling exports and suppressed oil prices and the expected effect on economic development. They are also concerned on the China and Greek effect. It is very much a view inline with the statements heard this week from the IMF.

For the hawks they see the same data in a different light. The jobs market has shown resilience and improvement (the minutes pre-date last week’s NFP statistics). They will not have missed the slightly improved wage growth results that were also revealed in the data. History has shown us that inflation can take hold remarkably quickly and that moves against it have to begin before improvement is established in core prices and wage inflation.

Then again no central bank has ever launched three rounds of trillions of dollars of QE before and had to manage their way out of it without causing major repercussions. And consider this. The FOMC as their bond buying ceases are not intending, it seems, to reinvest thus increasing bond supply, lowering value and putting pressure on the yields. This is some way off but it is a major part of the unwinding puzzle that will be the priority in the FOMC meetings.

The Continuing Greek Saga

The Eurozone continues to be the economy with the bleakest outlook. The IMF repayment was met last week by the Greek government but the funds are low. The PM, Tsipras has stated that faced with a choice, pensions and salaries will take precedence over loan repayments and he is fast approaching the time when choices will have to be made. Funding will be required by 24th April and there is now talk of a snap election.

Merkel is insisting the Greeks respects the bail out deal in all its clauses. The Troika have control, as the Greeks have no one willing to lend to them. The Greek finance minister has even approached the US. If it is not sliding towards Grexit it is as Schaeuble described ever closer to ‘Grexident’ an accidental exit, where the economy simply collapses. And then what of Spain and Italy?

In those circumstances, parity with the USD seems more than likely but with all the speculation and waning and waxing US dollar it won’t be a simple ride down. At present it continues in a range and approaches the lower bounds;

European stocks on the back of ongoing and long term QE payments have risen to new highs.

Meanwhile the German 8 year bund fell into negative territory. The 10 year hovering not far above down again on the week;

Fragile bits of data even showing the distant and rather vague hope of recovery will do little to raise Euro strength for anything other than a relief rally or a prolongation of the range.

The UK

With a widening trade deficit and a miss on Industrial output perhaps Christine Lagarde’s complements seem a little over optimistic as she refers to the UK as ”leading in a very eloquent and convincing way in the European Union”.

Of course like the USD strength it is a comparative and there is no doubt that the UK is heading in the right direction whilst the Eurozone stagnates and still is too close to deflation to call the battle won.

Also of note this last week showed services PMI beating the number. Always good for the British economy as this represents a major part of their GDP.

The big unknown here is the election result but that leaves recovery exposed in the likly event of a hung parliament. That translates into downside risk and certainly the mixed nature of the economic data supports a short scenario where there is underlying uncertainty.

Commodities and Oil

Oil continues in it’s range, but certainly with a little more up bias than seen of late. Maybe due to more rig closures and there is no doubt that the effects of that will be felt in terms of US production. Not yet it seems as inventories rose again last week. There is also the Iran issue, bringing a mini rally when the market became aware that the deal with Iran would take some considerable time to add to supply. The deal has not been finalised but if it goes ahead it will bring ‘floating storage’ to the market and as one expert analyst predicted could equal a years worth of the global demand . That would be a major delay in any rally and a threat of a lower ‘bottom’.

Right here, right now we are still in a range that may well be reflected in the commodity currencies and in particular the CAD

Commodities have hit a bit of an upward stride;

This would support the commodity currencies. However, on Friday, coffee and sugar price forecasts were ’slashed’ as Brazil’s currency hit a 12 year low. Of course this is a small part of the index which includes energy, metals and grains, but it won’t assist the rally. The index was up on the week but pulling back Thursday and Friday.

Gold is caught in a daily triangle but has been doing better in the last month with a solid uptrend. In a wide channel on the weekly perspective and should it break to the upside we might be looking for the top side of the weekly range. Gold is still a traditional though not quite so reliable hedge when sentiment starts to wobble. Here is the weekly perspective;

 The Bond Market

As already mentioned the bond yields continue to fall in the EZ. In the US the 10 year US treasury note closed up at the week’s end at 19.51, this after the hawks revealed in the minutes gave back the possibility of an earlier fed move;

The Week ahead

Trading ideas this week, centres around Euro weakness and the likelihood of ranges in the major pairings. Also some commodity improvement and among the commodity currencies NZD comparative strength;

On the radar

EURNZD

EURUSD

USDCAD

GBPNZD

When considering decisions the calendar has some potential catalysts to watch for;

In the US Core retail, Tuesday, unemplyment Thursday and CPI on Friday…a big week for FOMC data and inflation predictions.

UK CPI Tuesday and average earnings, also inflationary data so worth watching for signs of confirmation of IMF optimism!

Chinese news includes Trade balance and the rate decision. This is extremely important in view of all the recent challenges in this economy.

There is a not to be missed ECB press conference in a very politically charged environment! That will take place on Wednesday  midday.

Us consumer sentiment brings the news week to a close.

All these events hold the potential to move an already sensitive and volatile market so pay careful attention.

The data driven USD and the speculative nature of the market as they continue to predict FOMC decisions in the new environment of confusion, is likely to produce a switchback fact. Ranges are usually expected during northern hemisphere summertime, and the environment and sentiment right now seems to be establishing them.  Volatility can and should be anticipated whilst not making assumptions (ever!) in view of Grexit concerns, UK elections and US uncertainty. Not an easy market to negotiate.

Judith Waker