Global equities have managed to stage a small rebound from last week’s lows as markets reopen after a four-day holiday break. It would seem that some investors are growing less concerned about tensions in Ukraine and are confident about the U.S. first-quarter earnings season so far. For the majority of investors, geopolitical issues in Ukraine will continue to cast a shadow on sentiment – hence the lack of forex movement in the overnight session, apart from the yen recovering some of the previous day’s loss against the dollar.
Forex investors seek confirmation of direction, going out on a limb or a hunch has not been rewarding. For many, the forex theme has been to look toward central bankers- what is normally required. Be wary, relying on central bank talk alone is not having the dominating effect it’s had in times past. For instance, verbal intervention had no effect on the AUD during the Asian session. Treasurer Joe Hockey stated that the Australian government was not happy with the Reserve Bank of Australia’s neutral policy bias and that upward pressure on the Aussie made it more difficult to manage the economy. And yet the AUD continues to trade near the top of its range at $0.9365.
PBoC Weakens the Yuan
In the current environment, central bankers do not want to sit on their hands and ignore a strengthening currency. The deal has been mostly about verbal intervention on behalf of their domestic currency. A good example should be the Bank of England (BoE) this week – it’s expected to be more forceful in highlighting the impact of GBP strength on the outlook for monetary policy. In Japan, Prime Minister Shinzo Abe’s government and Governor Haruhiko Kuroda at the Bank of Japan (carry-trade opportunities talk) have been focusing on the value of the JPY. A weaker domestic currency is part of their solution in dealing with deflation. For other central banks, like the People’s Bank of China (PBoC) and the European Central Bank (ECB), they have been more active and blatant in dealing with their own currency’s strength.
In the first quarter, the PBoC worked tirelessly against most speculators’ positions. Record long CNY positions have been held. These are the ones that have been built up over the past 18 months in anticipation for the market to trade through that psychological CNY6.0000 handle. However, since the dollar lows in mid-January, and under the manipulation of the PBoC, CNY has fallen -3% — authorities have not only ended the gradual appreciation of their own currency but are in fact weakening it (CNY6.1810). The ECB has taken a different stance, as the tipping point has been the 18-member single currency trading through the €1.40 handle. ECB President Mario Draghi and company have been talking mostly about the impact of a stronger EUR, which according to authorities requires further monetary stimulus. The chance of the ECB taking the plunge and initiating asset purchases seems to be climbing. Embarking on this strategy would help the ECB achieve a number of objectives. Directly, it would be able to increase the ECB’s monetary base and reduce yields, and indirectly, lower the exchange rate, reduce credit spreads further and support increased lending. For the Federal Reserve, the focus is on inflation being too low thus the market interprets that rates will remain “lower for longer” stateside.
Bank of England Strangely Silent
Governor Mark Carney at the BoE has not been as vocal as his fellow central bankers when it comes to domestic currency valuation. He and his cohorts at the BoE have been relatively quiet despite the GBP being on a tear of late and trading close to its highest level in six years (on a trade-weighted basis £1.6331) as U.K. fundamentals continue to trump market expectations. Even with inflation trading at a four-year low (+1.6%) and well below the BoE’s threshold (+2%), the market should expect Carney to mention sterling’s strength and its impact on monetary policy when the minutes from the April 9 BoE Monetary Policy Committee meeting are released tomorrow. Other releases this week that are expected to affect the pound are March’s public sector finance data and the CBI’s April manufacturing and retail sales surveys due tomorrow and Thursday, respectively.
Watching the EUR is like watching paint dry. The European session has seen nearly “no” action when it comes to the 18-member single currency. The EUR continues to be glued to €1.3800 and it’s rumored that large vanilla expiries are a big influencer at that level. Most forex market participants will want to digest this morning’s U.S. existing home sales data before embarking on another adventure. For the already interested investor, like the EUR bear, they continue to struggle to build on the sell signal generated by yesterday’s downward breach sub-€1.3800 handle. The lack of follow through has the short-term bear positions challenged. Trading below €1.3790 is supposed to open up the way to the €1.3749 level. The longer that the EUR fails to break down, the more attractive the topside becomes.
Ukraine Crisis Keeps Traders On Edge