Caution In FX Ahead Of Rate Announcements

Monday April 25: Five things the markets are talking about.

This is a big week for capital markets on the Central Bank front. Both the Federal Open Market Committee (FOMC) and the Bank of Japan (BoJ) hold policy meetings.

While the Fed is expected to maintain the status quo, Governor Kuroda could ease given the fallout from the recent earthquakes, already slow growth and non-existent inflation. Nevertheless, investment sentiment is expected to remain cautious going into the decisions. For the Fed, the focus will be on whether its statement sends a signal about the possibility of a rate increase in June.

Elsewhere, Q1 growth data will be released for the U.S., U.K, France and the Eurozone.

In Australasia, the Reserve Bank of New Zealand (RBNZ) has its own policy meeting mid-week, while Japan will release its end of month slew of data – the data is for March and will not reflect the impact from the recent earthquakes.

1. Global equities are on the back foot

Global equity markets are somewhat cautious going into the final week of the month. China concerns remain to the fore; due in part to worries about a potential wave of corporate defaults hitting the country’s bond market.

Overnight, the Shanghai Composite was one of the worst performers (-0.5%) among the key regional indices, pressured by comments from the People’s Bank of China (PBoC) Deputy Governor Chen Yulu, who again drew attention to the rising credit risks faced by China’s financials, adding that the downward pressure on the economy could once again impact financial stability. Also putting pressure on Chinese stocks prices is that many local investors are seen liquidating their equity portfolios to chase a rally in mainland commodities futures.

2. Rise of the Yen

Overnight, the Yen (¥111.22) was the best performer amongst the majors, one session after tumbling by the most in two-years.

On Friday, the Yen slid -2.1% outright on rumors that the Bank of Japan (BoJ) may be considering helping banks lend by offering a ‘negative’ rate on some loans. The Yen selling gained traction as the weaker Yen ‘bull’ positions were forced to unwind their bullish bets on the Japanese currency printing new record-high level on risk aversion.

After touching a three-week high of ¥111.90 overnight on hopes that the Bank of Japan might launch extra stimulus measures, dollar’s sellers finally appeared in the form of Japanese corporate players such as exporters ahead of their books closing at month end.

The BoJ’s policy setters are scheduled to meet April 27-28.

3. German Ifo survey misses expectations

Germany’s Ifo business sentiment index slipped unexpectedly to 106.6 this month from 106.7 in March versus market forecasts of a rise to 107.0.

Today’s outcome is in line with the Germany’s composite PMI reading for April, which would suggest that Europe’s economic powerhouse could be facing “sluggish” economic growth. If that is the case, perhaps the consensus forecast of +1.6% German GDP growth this year is a tad too aggressive. Do not be surprised to see a number of suggested revisions going forward.

Digging deeper, the Ifo’s measure of the current business situation dropped to 113.2 in April from 113.8 in March, but its gauge of business expectations rose to 100.4 from 100.0 the previous month.

4. Crude oil pares price gains

Crude oil prices pared gains in Asia/European trade as traders took profit after a strong rally last week on signs that the global oil glut might start to ease in the coming months.

Supply and demand and not economic fundamentals continue to drive prices. WTI light, sweet crude futures for delivery in June traded down at $43.05, while June Brent crude fell to $44.51 a barrel.

Nevertheless, oil bear speculators continue to look to the Saudi’s and Iran to justify their negativity. The Saudi’s, who are the world’s largest exporter, are expected to maintain their total capacity at +12m barrels a day, while Iran has increased its output by +1m barrels a day since sanctions were lifted four-months ago as justification to lean on any markets rallies. Until there is an actual cut in production, the lack of global consumption and/or growth does not support higher crude oil prices.

5. Emerging Market forex seeing tentative support

Forex dealers and investors will take their cue from the Fed announcement mid-week. Until then, a number of intraday price moves will remain unexplained and sometimes irrational.

The market consensus expects a “non-committal cautious statement” from the Fed’s Chair Yellen and company. If so, this will be insufficient for markets to be able to price in a more hawkish U.S. interest rate path. The Fed is not in the habit of destabilizing markets ahead of the possibility of another Tier 1 Central Bank actually doing something – the BoJ.

By default, a wishy-washy statement could result in gains for emerging market currencies outright, while G10 lower-yielders will again remain largely range bound. There is always and exception to the rule and that could be Yen.

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell