Last week, market participants were looking for firm directions but they never got a clear answer following last Friday’s unimpressive U.S. jobs data that caused the dollar to dip against the euro and yen. On a brighter note, investors can take some comfort knowing both the Federal Reserve and the European Central Bank (ECB) remain on course. And yet the details that help investors formulate their own directional plays are still missing. This does not suggest that forex opportunities do not exist, but it makes longer-term directional play much more difficult, thought it allows the opportunity for more intraday volatility to occur within the world’s largest asset class.
China delivered a “targeted mini-stimulus” with no price tag that basically repeated the investment priorities put forward by Beijing in late 2013 and early 2014.
Draghi and the ECB stood pat again and repeated all of the policy-making talking points. Draghi asserted that inflation would turnaround on its own accord in the coming months, although he did mention the theoretical possibility of a quantitative easing (QE) program for the eurozone if it can’t. He conceded that the ECB’s Governing Council did discuss potential rate cuts and the merits of a QE program (as well as lower rates and a negative deposit rate), but on inflation he repeated that while the March eurozone inflation report was a surprise, the ECB still expects higher inflation in the months to come. It was a seasonal factor that supposedly distorted March’s inflation levels, 70% of the fall-off in inflation was due to lower food and energy prices.
Euro Aided by Draghi’s Stand
What about the EUR? Asia and Europe have been unable to react to the price action following the latest batch of U.S. jobs numbers (last Friday it ended up being a zero sum game). This morning’s slow grind toward €1.3720 is not a convincing rebound, but one that seems to be more uncertain rather than a bullish conviction. The market is not convinced that the ECB’s latest bombardment of “rhetoric coupled with policy inactions provides a ground for a EUR selloff but central bank divergence.” For the EUR bear, the single currency’s right hand side feels the most vulnerable. A plethora of ECB speakers today will hopefully shed some light on the bank’s intentions with respect to non-standard policies. The techies expect the €1.3690 support level to continue to hold.
Last Friday’s U.S. jobs report was good, but not anywhere near great. The headline print was slightly higher (+192k and +6.7% unemployment rate), but other weak job trends remain. Many analysts were concerned about the flat hourly earnings component (they grew +0.4% in February) and the continuing weakness in underemployment. Fed Chair Janet Yellen cited both issues at her post-Federal Open Market Committee press conference as reasons for rates to remain “low for an extended period.” Meanwhile, what has the International Monetary Fund Managing Director Christian Lagarde worried is that U.S. trade data remains sluggish with lower overseas demand weighing on American exports – this is not just a U.S. problem. Expect many to downgrade their outlooks for various economies’ first-quarter growth.
Abenomics’ Effectiveness Questioned
In Japan on April’s Fools’ Day, Prime Minister Shinzo Abe and his government raised the consumption sales tax from +5% to +8%, disregarding weak Tankan survey data suggesting Abenomics is facing headwinds. The Japanese Government Bond (JGB) market remains firm, helped by uninspiring domestic economic data. The current domestic economic situation will require Bank of Japan (BoJ) Governor Haruhiko Kuroda to be more proactive. The market believes that the BoJ has little choice than stay with accommodative policies for longer. This should weaken the JPY further. Being short JPY on the crosses and outright to the USD has been a market “go-to trade” for some time, and the possibility of any further easing will only support it – it’s the timing of owning the trade that is the most important. Currently, the post-U.S. payroll aftermath, and a 10-year slide in yields, is taking its toll on long USD/JPY (¥103.10). The key bearish day posted on Friday suggest further downside within the current range and asset allocation flows away from high beta momentum stocks.
Follow the U.S. yield – it should be this that helps in deciding what yen traders want to do. The fixed-income market is beginning to price in further BoJ policy easing beginning in July. Last week, this allowed USD/JPY to print a nine-week high- it made a few runs above the psychological ¥104. The BoJ has begun its two-day policy board meeting with a decision due tomorrow. The board is expected to maintain its monetary policy targets, as there are no signs that downside risks to growth and inflation are increasing at this point.
Loonie Unable to Fly too High