The confrontation in Ukraine, which has upset markets over the past week, is keeping investors on edge heading into the Easter long weekend. Expect forex ranges to be tight, volatility kept to a minimum, and liquidity to become thinner while watching for any developments on the geopolitical front. Already, the four-party talks (between Russia, Ukraine, U.S., and European Union diplomats) starting in Geneva today has U.S. officials admitting that they do not have much confidence of a breakthrough. The delegations are supposedly focusing on a blueprint designed to reduce friction between Russia and Ukraine. However, in an ominous sign, the U.S. seems to be preparing for additional sanctions against Russia if the situation remains unchanged.
Federal Reserve Chair Janet Yellen spoke at the Economic Club of New York yesterday, reinforcing her willingness to keep interest rates low until the recovery is on a “more secure footing and the American economy is more fully involving available workers and other resources.” A robust and healthy jobs market still appeared to be “more than two years away,” she said. The “lower for longer” talk had probably more to do with clarifying her remarks last month during her first news conference as Fed chief that suggested the central bank might begin backing up rates as early as the middle of 2015. It seems that a significant dollar movement is probably going to have more of immediate reaction to the release of fundamental data as they come in — if so, the key will still be employment data.
Yen Gains on EUR, USD
Even verbal intervention from Eurocrats, especially the French over the past 24 hours, is having little effect in downward price action of the 18-member single currency. Rhetoric is not dissuading the long positions and the longer that the market does not go down the higher the chance that weaker short positions will be squeezed on the topside. For most techs, the scope is to test that psychological €1.4000, as the failure to breakdown through €1.3775 with gusto puts the overall bias on the upside for now at least. This year’s €1.3967 peak still beckons.
Meanwhile, Japanese Prime Minister Shinzo Abe and his government face an uphill climb, and if anything, the mountain they’re scaling has gotten higher. Earlier today, the Japanese government amended its country’s economic view for the first time since November, 2012. This was done on the back of the recently implemented consumption sales tax hike. Tokyo cut its overall views on consumption, housing investment, factory output and imports. Despite all of this, Japanese officials still feel confident in the stimulus measures that they have put in place. The government continues to indicate that there is “no gap” in view with the Bank of Japan (BoJ). Governor Haruhiko Kuroda continues to reject the need for immediate easing action despite government data signaling a sharp pullback in consumption. The BoJ’s stance will certainly disappoint the short JPY positions that have been hoping to see the bank act early to prop up tentative growth. The JPY remains rudderless., Immediate direction is geopolitical and option demand-related.
Pound for Pound
The currency of the moment is still sterling. The pound continues to advance against most currencies, hitting a four-and-a-half-year high against the dollar in overnight trading (£1.6839) as expectations for the Bank of England (BoE) to impose an interest rate hike continues to gather momentum. Robust jobs data this week (U.K. unemployment rate fell to 6.9%) has many beginning to shift their interest rate sentiment from neutral to hawkish. Mind you, Yellen’s comments yesterday emphasizing her focus on low inflation and economic slack are also supporting GBP (£1.6818). For many, the BoE seems to be leading the pack of central banks in starting to raise benchmark interest rates as the British economy is expected to expand at a faster rate of growth than the U.S. this year (2.9%). But this is guesswork, and as the Canadians can attest, Governor Mark Carney is not easily swayed.
Nothing Untoward From The BoC