Yen Continues To Bully The EUR

Market losses were exacerbated in all asset classes yesterday following data that showed that China’s economy expanded more slowly than expected. Many investors happened to jump, pull their ripcord and sought shelter in risk averse trading positions. Since then, the extreme market moves, especially within the commodity class, had some investors looking for bargains after the heavy market losses. Gold this morning has managed to get itself off the floor and bounce into positive territory from a two-year low. Risk aversion carried the yen higher than the market had expected, but USD/JPY’s rebound through Asia and Europe, without fresh news, suggests that this recent correction could be over.

The yellow metal has been trying very hard to lose its ‘shine’, however, despite printing a new two-year low during the Asian session the commodity is standing upright this morning. Capital Markets have been consumed with commodity price moves over the past-two sessions – attribution for gold’s two-day break is given to a huge sell order (+400-tonnes) from last Friday. Not helping matters and providing a significant dent to investors risk psyche was the below expectation GDP growth figures from China over the weekend. Has the market been able to break the commodity bulls back? Not yet broken, but very much strained as major weekly support now appears at $1,325 and resistance topside above $1,413 and $1,436.

To the few initiated gold bugs, there have been four-key factors for the gold’s historic collapse since last week:

• India – The country has hiked its gold import tax rate by +50% to 6% at the start of this year. This has curbed gold demand.
• Chartists – Technical analysts have continue to warn the public that that gold prices will continue to fall.
• Cyprus – Chancellor Merkel is seeking re-election in Germany this September, and she is trying to distance herself from the ailing periphery problems to win further domestic favor. She has told Cyprus and others that they should sell some of their gold to pay their debts – Germany is tired of bailing out the EU “have-not’s.”
• Bitcoins – Do not underestimate the collapse of Bitcoin – most investors also happen to own gold as well.



When discussing FX rates one must keep an eye on the Fixed Income market – o/n rates and yield curves, along with debt positions can be very insightful for future currency prices. Two of the U.S’s biggest foreign creditors parted ways in February. China’s U.S Treasury holdings increased by +$8.7-billion to +$1.27-trillion while Japan was a net seller of U.S product, cutting its inventory by -$6.8-billion to +$1.097-trillion. Do not be surprised to see Japanese market dynamics change over the coming months after the BoJ’s governor Kuroda unleashed an aggressive easing monetary policy last week. The market now expects domestic JGB holders to cash out their own bonds and seek higher yield solace in U.S treasury’s and other high-grade foreign bonds. Japan could potential dethrone China as the largest foreign owner of US Treasury bonds.



The market needs to keep a closer eye on UST/JGB spreads for dollar direction. From last week they have narrowed sharply on the back of weaker US data. Despite the BoJ’s focus on longer dated securities, the narrowing on the long-end (30′s -29bps) remains out of order with the markets bullish expectations for USD/JPY. The timing for 100-dollar yen remains a moving target, so with narrowing spreads along the curve and with a market biased long USD/JPY there is an argument for another correction and the G20 meeting scheduled for later this week is a good enough of an excuse to want to pare some of their short yen positions. However, the smooth running of today’s 5-year JGB auction would also suggest that some calm has been restored to USD/JPY market. The dollar has seen an aggressive move from Asia’s over-night low (95.67) and is building for an upside assault. Through Monday’s peak of 98.71 unmask 100 – Will the G20 meet this week come too soon?

If it’s not yen we are talking about then it’s a commodity. All week it seems that the commodity currencies continue to have problems deciding their fair value. Despite a delayed broad sell-off of risk sensitive assets after weaker than expected China growth headlines and commodity prices plummeting, currencies like the loonie and AUD seem to be well contained, surrounded on both sides with ‘few’ market orders. The negative fallout for the loonie in particular could be even negated further by the BoC in tomorrow’s session. The Bank du Canada has its policy statement announcement on Wednesday. If Canadian policy makers retain their mild tightening bias of late can only be bullish for the coin with the ‘loon’.



Italy for a change did not suck in the headlines – only in the details – while Germany truly disappointed. Euro-data this morning saw Italy post a foreign trade surplus of +EUR1.1-billion in February, erasing a similar deficit amount from a year earlier. However, the improvement reflected slumping domestic demand in the Euro-zones third largest economy. Exports fell -2.8%, y/y, while imports fell a steeper -9.6%. The month-over-month also happened to disappointed (-2.8% and -3% respectively). Weak demand from Germany was Italy’s major headwind (-9.7%, y/y).

Germany has not been able to escape the markets negative clutches this morning. The single currency dipped to its intraday lows of 1.3028 after the German ZEW survey disappointed on both components and the annual rate of Euro-zone inflation fell to its lowest level in nearly three-years (+1.7% – well below the ECB desired rate of +2%). The ZEW economic expectations indicator declined for the first time in five months, to 36.3 in April from 48.5 in March and well below expectations of 43. This would suggest that Europe’s largest economy is taking longer than previously predicted. However, analysts are hopeful that the recovery will pick up speed in the summer, pulled along by an uptick in global demand.

U.S data this morning should have minimal directional FX impact. Analysts are expecting housing to continue to hold up even as headwinds have started to appear elsewhere in the economy. The market is looking for housing starts to expand to +935K in March, the highest level since December 2012, while CPI should decline -0.1% in the same month for the first-time in four-months, following February’s largest monthly advance in almost four-years, with “gas as the swing factor.”



The single currency direction will be determined by investors growing fears about troubles in Slovenia, Portugal and Italy and their eventual impact on the German economy. Even if Germany can easily outperform the rest of its neighbours, a strong and sustained recovery may well be beyond one country’s reach. EUR/JPY continues to support the 17-member single currency. When yen starts to turn the single currency will favor its left hand side – for now the market prefers to be a better seller of EUR’s on rallies



Other Links:
Gold Bears Mission Accomplished: Is the EUR next?

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