The confrontation in Ukraine continues to keep investors on edge over this long European holiday weekend. The situation remains precarious despite the unexpected four-party agreement in Geneva last week and the temporary suspension of the “anti-terrorist” campaign. The “he said-she said” activity is quickly exhausting the West’s Russian sanctions stand — it seems a more diplomatic approach with Russia is now required. Therefore, it’s no real surprise that forex ranges have been tight, volatility kept to a minimum, and liquidity thin while watching and waiting for any positive developments on the geopolitical front.
The dollar majors have largely remained in a narrow holiday range with USD/JPY the most notable mover, rising to a two-week high above ¥102.60 after a wider-than-expected trade deficit in Japan. The kiwi did manage to spike above $0.86 in the early Asian session but has since reversed all of those gains, while the AUD matched its Friday highs of $0.9340 before retreating and treading water ahead of the North American session. Last week’s Commodity Futures Trading Commission positioning data report happens to show that the net longs in both the AUD and NZD currencies have hit 11-month highs.
Japanese Trade Deficit Swells
Japan’s bigger-than-expected rise in its March trade deficit — imports have surged and exports remain subdued — has encouraged investors to sell the yen. It seems that some are happy to treat the latest disappointment in the Japanese trade balance as reason enough for more speculation over the Bank of Japan (BoJ) turning less neutral in favor of more easing. The BoJ’s policy statement at the end of this month will also feature the release of its semiannual outlook on prices and the economy. Japan’s March trade deficit for the fiscal year is a $14B deficit — four times higher than last year’s print. Exports showed a negligible rise of +1.8%, year-over-year — well below the +6.5% consensus — while imports spiked by +18.1%, year-over-year, mostly due to another double-digit rise in shipments of crude oil.
Pressure on BoJ Ratchets Up
What’s the BoJ to do? Will it be proactive and provide further quantitative easing or should it be relying on price fundamentals for direction? Japan trusting inflation prints can give a distorted view of what is currently happening. This Friday’s Japanese inflation data is likely to show above-target inflationary pressure, somewhat masking the BoJ’s policy agenda as being successful. Both Tokyo’s and the Japanese nationwide consumer-price indexes (CPI) are released together, and the market expects a 2.8%, year-over-year, inflation print in the Tokyo region – a reading well above the BoJ’s +2% target. This higher reading does “not” equate to the BoJ’s mission as being completed. Analysts note that the implementation of the sales tax hike on April 1 will have somewhat artificially boosted Japan’s inflation headline prints (companies passing on the sales tax hike to customers). The BoJ has already recognized this and will adjust April’s inflation print downward by -1.7% to reflect a truer picture of inflationary pressures in the region. The BoJ’s aim is to generate “sustainable” inflation. BoJ Governor Haruhiko Kuroda’s problem to date is that the uptick in Japan’s inflationary pressures has been mostly due to yen weakness, and with no “fresh” weakness for months, the price of the CPI basket can only be expected to stall.
With many markets around the world closed last Friday, and in light of the Easter Monday holiday in Europe, market activity is expected to be light today with North American participation kept to a minimum.
Forex Market Going Through The Motions