Are The Yen Bears Afraid To Lose Face?

In capital markets, especially forex, the trend remains your friend, boring but true. Actively watching or participating in any consolidated range trade action can be rather tedious and the current state of play is no exception. The forex market is hoping that today’s US Retail Sales data and a couple of significant Euro debt issues provide some extra ‘food for thought’ and act as catalyst to break the obvious.

Euro equity indexes are under pressure this morning, certainly a change-up of note, weighed by a series of disappointing earnings reports. There is an overriding sense in the market place that this one-directional asset class of late is due a correction following the recent ‘global’ record rally. There is copious amount of cash remaining on the sidelines and it will be interesting to see if price pressure encourages more investing to sustain the rally. If not, a change up with ‘momentum’ will certainly have an impact in forex.

Current EURO dynamics has the 17-member currency trading in a 200-point range since the start of the month. Many investors have moved quickly to take profit on their lemming EUR shorts positions ahead of 1.2900, which is keeping the single unit supported. With so few calendar events of note so afar this week the EUR is finding it difficult to establish a meaningful breakout. This market seems to waiting for an Italian flare up to act as a negative spark.

These days, by nature any bond issuance by a Euro periphery nation gets to test investor’s real appetite for risk. Earlier this morning, Italian bond yields remained relatively steady ahead of a key test of their appetite for Italian debt. The Italian Tesoro auctioned +EUR5.5b of conventional bonds and +EUR1.75b of floating rate notes. The relationship between Italian government bond yields and the single unit is relatively strong. Despite higher yields being expected, investors looking for greater returns have been limiting these yields. Up until now, demand for Italian product had been relatively strong despite the country’s inconclusive election results. This morning results, on first go around, demand was weak. However, it seems that one periphery issue gets to compensate another. The Irish 10-year issue saw strong demand.

Buying USD/JPY has been the “no brainer trade” to date, fueled by better than anticipated US fundamental data and supported by the expected reflation BoJ efforts next month. This morning’s US sales release is a key event risk, coupled with a new twist emerging in the Fed’s exit strategy had some long dollar speculators prudently paring their primary positions. This will only be considered a short-term market correction, unless of course US retail sales happen to horribly disappoint.

The market expects the likely appointment of Kurod, as the next BoJ governor will bring about further aggressive easing of monetary policy. The current Yen demise accurately illustrates the dividend returns of a well-orchestrated and clearly communicated central Bank strategy. All that remains now is that the BoJ will have to deliver on these expectations that investors have so far priced in. The April 3-4 meet needs to deliver some large scale asset purchases, buying of longer dated JGB’s and some credit easing, otherwise we will have a disappointed market who will want to unwind these positions.

The BoJ will be expected to expand their balance sheets, which is nothing different to other central banks. However to date, foreign QE effect has had more of an impact on equity indexes rather than the forex market. The Fed, BoE and ECB constantly remind the market that QE is not “the” solution, it’s “a” solution. A mixture of governmental growth and reform strategies is also required. The BoJ cannot afford to burst the myth they are expected to deliver. One wonders now how much longer other Asian central banks can go without reacting to the weak Yen threat?

The JPY is trying to rebound ahead of BoJ nominations because the feeling in the market is that the process will not go smoothly. In the end, the market should not expect political posturing to hold the currency to ransom. Japanese political parties (Your Party, the Japan Restoration Party, and the New Renaissance Party) are scheduled to announce later today their intentions on the confirmation votes for Haruhiko Kuroda to become BoJ governor and Hiroshi Nakaso and Kikuo Iwata to be deputy chiefs. Yesterday, the Democratic Party indicated it would support Kuroda and Nakaso, and vote against Iwata.

It’s up to US Retail Sales results and 10-year supply to perhaps break this market monotony. Consensus is looking for retail sales to have increased +0.7% (+0.8% ex-autos) in February, an acceleration from January (+0.1% headline, +0.2% core), driven primarily by higher gas prices. A strong reading would be a continuation of the good data from last week, a dollar supporter and capable of pushing the US yield curve higher.

The single currency requires a fresh catalyst to push the EUR out of this perceived 1.2950-1.3150 range. Overall market sentiment remains bearish, however, it seems that on any failed drive down towards 1.3000, investors continue to get themselves too short, as noted by the repeated break through failures. Selling rallies remains the favored strategy to date.

Other Links:
EURO Is Locked, Cable Is Horrible and Yen Not Wanted

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