One gets the feeling that there is less ‘straight line’ risk being applied, especially with the hedge fund community caught still quite long risky assets. Until now, the risky asset trading strategy approach has been reasonably resilient, with a large percentage of investors seem to be wagering that last weeks â€˜uglyâ€™ US payroll print will bring forward the next round of quantitative easing. Helicopters Benâ€™s keenly awaited speech last night proved to be another nonevent, with him refraining from discussing monetary policy. However, investors should be looking at a plethora of other Fed speeches this week for any hint of easing, which can only be bullish for the dollar. For the time being, the dollar remains in its sweet spot; performing well in both a strong US data and in risk-off scenarios.
It’s a slow week for US data, with only inflation and consumer confidence data on the calendar. The main event is likely to be the CPI release this Friday. Close market scrutiny is anticipated following last week’s more hawkish-than-expected FOMC minutes. Any topside inflation surprises, specifically the core, will further support the recent dollar strength, especially against the EUR and JPY.
Post Easter break, markets have been taking their cue from China, Japan and the ever widening Euro periphery spreads. Their was a â€˜smallâ€™ percentage of a chance that the BoJ was to continue along the easing path last night after last months surprise announcement. However, Governor Shirakawa refrained from expanding monetary easing to counter deflation, resisting pressure from his fellow politicians who five days ago rejected a nominee for the policy board. The BoJ have kept the key interest rate between zero and +0.1% and left its +JPY30t asset-purchase fund and +JPY35t credit-lending program unchanged. Post announcement has seen fresh JPY cross weakness, especially against the EUR, as intra-day longs have been selling aggressively on the push back below 107 (106.28). Outright, JPY is down from a post-fix/pre-BoJ high of 81.87 to a low of 81.10. More bids are eyed around the figure, however, stops are again placed sub-81 ahead of support around 80.50. The intraday topside continues to come down with offers appearing around 81.50+.
China reported an unexpected trade surplus last month as import growth trailed forecasts, emphasizing the risks of a deeper slowdown in the worldâ€™s second-largest economy. Inbound shipments rose +5.3%, well below the +9% estimated. Exports increased +8.9% from a year earlier, providing us with a trade surplus of +$5.35b, compared with a projection for a -$3.15b trade deficit. Markets are still trying to figure out if we are experiencing either a hard or soft landing in China and Monday’s high inflation reading of +3.6% certainly has dealt a blow to hopes for more stimulus from the PBoC. Watch Aussie as a regional proxy trade for growth with its largest trading partner China. Risk aversion is hurting this high yielding currency, especially influenced by AUD/JPY (83.48). Outright option barriers are tipped at 1.0225 and 1.02 along with many expiries today.
The European periphery again is in focus, pressurizing the single currency as Spanish yields trade new year highs (+5.84%). Evidence continues to mount that the effects of the ECBâ€™s LTRO program, credited for calming bond markets, is wearing off. Thrown in a â€˜dampenedâ€™ risk appetite, fueled by Fridayâ€™s NFP, to a market that has been on an Easter bunny hiatus and we have the ingredients for an illiquid frantic catch up trading day. Italy has an important bond issue this Thursday, it will prove to be a good measure for regional product appetite. Until then, the EUR downward squeeze remains, with sub-1.30 beckoning.
What is the BoJ to do? 
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