There is nowhere to run and nowhere to hide from the unwinding of quantitative easing, or so it seems? Vast amounts of monies continue to scour the various asset classes looking to book a good yield – for many players it’s their only sanctuary. What investors are witnessing is a recalibration of asset prices of sorts, as central banks consider their exit strategies of QE or lack of them. This pricing mechanism is our “new” runaway train that is sure to cause more collateral damage.
When the World Bank comes a cutting, risk averse trading strategies get support. Yen, one of the go-to global reserve currency of choice, is getting the chance to muddy the dollar-positioning story even more dramatically again this week. Abenomics was under a ‘yellow’ card of caution after last month-end dramatics. Investors could well be seeing ‘Red’ very soon. The on going positional changes in the world’s most crowded trades (long Nikkei and Short Yen) is questioning outright the efforts of the Japanese government and BoJ’s actions as a solution to their country’s economic woes.
With almost everybody of note revising, it would be remiss if the World Bank did not do it! They have now officially cut its global growth forecast for this year after emerging markets from China to Brazil have slowed more than projected. Their analysts cited that budget cuts and slumping investor confidence seems to be deepening in Europe’s contraction. So far it seems that governmental agency have been blowing smoke somewhere to at least benefit the investor, albeit by paper wealth or on general confidence terms. However, things are slowing starting to unravel. According to the bank, the world economy will expand +2.2%, less than January’s forecast for +2.4% growth and slower than last year’s +2.3% – many would still argue that this headline print is still a tad too high!
Volatility is back with a vengeance, and a “summer of love” is not on Capital Markets agenda. Investors appreciate volatility, dealers crave it, and it looks like both camps will be well serviced to the run up of the German federal election and for the remainder of the year. All things considered, this could be one bumpy few months for Capital Markets where getting your second wind may take too long!
In the overnight session the once mighty USDJPY has broken another psychological barrier- trading below ¥95 and keeping the correlation trend intact. The Nikkei continues it’s mini crash – dropping -6% during the Asian hours. It will soon be a perquisite for Prime Minister Abe to talk his ‘own’ book? Even the Chinese markets, which opened for the first time this week, traded down -3% from last weeks level on weak macro data released over the weekend. It’s currently difficult to find any regional positive traction. Global growth is slowing with no inflationary pressure in sight.
The Japanese stock market is down more than -16% from its highs – we can almost classify it as a mini-crash with other emerging markets stocks are also down sharply. Wealth is disappearing quickly from investors, the “western world gravy train cannot continue.” The dollar has declined against the EUR rather than appreciate, as the reality of a slowdown versus a spectacular rally witnessed in equity markets over the last 18-months, comes to a halt during asset recalibrating.
The 17-member single currency has touched and traded through 1.3340, the +61.8% retracement of the 1.3711-1.2740 move. Any technical analyst will tell you that this is the single currency’s bullish aura. The tech’s medium term target is for market gains a good ‘strong’ cent higher towards 1.3480-90 level. The current price momentum remains positive or bullish – investors are encouraged to sell dollars on EUR pullbacks. Until this market realizes that the Fed is unlikely to raise interest rates until employment has fallen to +6.5%, only then will the demand for US debt product as a safe haven be rekindled – dollar bullish.
This morning’s US retail sales headline may cause a small stir. Some analysts are expecting both headline (+0.4%) and ex-auto sales (+0.5%) may put in its best showing in three-months. While the core ex-auto and gas sales (+0.5%) could rise at its fastest pace in five-months. Along with US weekly jobless claims coming in unchanged (+346k), the negative dollar may manage a small reprieve giving investors an opportunity to improve their portfolio average. The new market theme has investors becoming hyper sensitive to data prints that could tilt their expectations with regards to asset purchase tapering – a good reason for no “summer of love”!
Euro Steady, Tests 1.33 Line
Dean Popplewell, Director of Currency Analysis and Research @ OANDA MarketPulseFX
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