The subtle forex squeeze remains with currency performance and it is being influenced by credit spreads. This morning’s European session followed another night of mixed fortunes in Asia, particularly in Japan where the Nikkei closed down -300pts at 14,300 on the back of more yen strength. Over the last four sessions, the main Japanese index has managed to shed nearly -900pts. In contrast, the slide at stateside bourses since the rather benign nonfarm payrolls report last Friday seems to have stopped temporarily, as indexes hold above key double-bottom support levels. With the Federal Open Market Committee’s March minutes on hand later this afternoon, combined with a lack of market-moving data today, investors can expect to be exposed to few earth-shattering events.
On the forex front, investors can expect more of the same as currencies become confined to a contained range. With no hint of further easing from Governor Haruhiko Kuroda and company at the Bank of Japan (BoJ), the JPY continues to strengthen (¥102.00). The JPY’s actions have obviously weighed heavily on the Nikkei, which has closed down -2.1%. Lower USD/JPY is tracking the overall USD weakness that follows a bid in U.S. Treasurys where the yield on the 10-year has fallen to +2.68%. The market is also expressing broad disappointment with Kuroda’s neutral remarks, after he ruined expectations for more easing accompanying the release of the semiannual outlook on prices and economy in a fortnight’s time. The possibility of Japan expanding its quantitative and qualitative easing program is probably close to being nil, although ‘some’ analysts expect an announcement of more easing by the BoJ in July. On the flipside, any strong reading from U.S. data could widen the yield gap between U.S. Treasurys to Japanese Government Bonds, clearing the way for the mighty dollar to bounce back toward ¥103 rather quickly. The market remains predominately dollar-short below ¥102.30, with targets at ¥101.45 and ¥101.20 in view. It’s worth noting the month of April is usually when Asian currencies tend to perform well against the “mighty” USD, and so far, this month has been no different.
ECB Talk Down Fails to Move EUR
For the time being, the 18-member single currency is unlikely to stray too far from the $1.3800 handle. The EUR has returned to neutral ground, where further consolidation is to be expected. At $1.3805, it is the mid-point of the trade since mid-February. With no other data and large $1.38 option expiries expected today, a tight range is close to a certainty. One should assume some model stops have been parked above the 21-DMA and on the weaker side of the possible range. A momentum break through the $1.38 handle should quickly convince the market to drift toward $1.3850-60, where some EUR sales are to be offered on the first go-around. Even the overnight collective European Central Bank (ECB) rhetoric has not been able to persuade the EUR to retreat much – ECB Governing Council member Christian Noyer would like to “see the EUR a bit lower.” Euro policymakers do not blame monetary policy for the currency’s strength. In their view, that has more to do with stronger investor confidence.
AUD Hits New High
The Aussie is on a tear! Overnight, Australian economic data points were positive on both counts as we head into this evening’s employment change release. The positive outcomes managed to push the AUD to a fresh five-month high ($0.9383). February home loans rose 2.3% — the highest rate in five months — while April consumer confidence saw a sequential rise for the first time in nearly half a year. Reports like this serve to fuel fears of a house price bubble that could bring forward an interest rate increase by Governor Glenn Stevens at the Reserve Bank of Australia – currently the fixed-income traders have the first rate hike priced in for the middle of 2015. The next leg for the currency will depend on tonight’s employment report. Consensus is looking for a new job growth number of around +5k and the unemployment rate to inch up a tad to +6.1%. A release like this could possibly keep the Australian dollar in check and cool some of the recent hot moves by the currency pair.
Red Hot Sterling Smothers EUR