Forex Window Dressing Makes Price Action Interesting

Capital markets is about to sign off on Q1, a quarter really not worth remembering, and embrace Q2, a quarter jammed packed with fundamental and event risk that should be capable of stirring up a few notable investment opportunities for investors. Thankfully this first week has a bit of everything, enough to keep investors and dealers on their toes across all asset classes. There are a number of retail sales reports, employment headlines and inflation data points that are bound to make some monetary policy announcements that bit more interesting. None more so than the ECB’s rate decision this coming Thursday. But before the market gets to appreciate the nature of these events, expect some month-end, quarter-end window dressing to be carried out where some forex price action really does not make too much sense.

The market has been looking for a stronger signal to support investor conviction in regard to the ECB’s and Draghi’s next rate move. This morning’s Euro-zone’s CPI flash estimate will be used by many, especially as the annual rate of inflation across the region that share the EUR fell again this month (+0.5%) and to its lowest level in five-years. Members are moving closer to a “paralyzing bout of extremely low inflation or worse deflation.” Numbers like these puts further pressure on policy makers to consider fresh stimulus measures when they meet in a few days. Chronic low inflation makes it that more difficult for households, businesses and governments to service their debts (fixed amount), while consumers tend to delay consumption which effects economic growth. All you have to do is look to the east and see what has happened to Japan over the past two-decades. There, Prime Minister Abe remains on the back foot despite Japan’s aggressive QE program. The ECB sees it differently and continues to reiterate that the Euro- zone is not in deflation and that the market should not over-react as a fall off in inflation is more likely due to cyclical factors, which are seen as temporary.

What investors have to decide is whether this morning’s Euro price reading is weak enough to prompt action at Thursday’s April Council meeting or is it coming a tad too late? The single currency’s initial knee jerk reaction had the EUR spike to a fresh day low of €1.3721 before retreating higher, supported by EUR/JPY stops being triggered above ¥142 and driving the EUR against Euro-zone sellers. Logically many will expect the EUR’s recovery to remain weak as speculators factor the risk of ECB ease. Already this year cross flows have dominated the single currency’s contained direction, especially with EUR/JPY, which has tended to lead the way. Many will now be expecting the ECB to deliver a policy easing when it meets – we could see a token cut to the refi-rate and/or a decision to end SMP sterilization and shy away from negative interest rates. Draghi and company may talk about QE, but is unlikely to go down that route just yet. Euro policy makers seem to what to cap the EUR at 1.40 for now and a failure to ease policy this week could see the currency pair easily back up and through the region and beyond to the loss of euro-zone exporters.

Also this week, expect Japan, Australia and China to keep things interesting. In Japan, their manufacturing continues to slow (-0.6%) and this despite the anticipated drop-off in consumer consumption going into the start of the higher sales taxes this week. Even the industrial production for February fell sharply as well, dropping – 2.3%, the biggest decline in 8-months. PM Abe and the BoJ have their work cut out – do they need to be more proactive? The Yen for now is being dictated to by EUR/JPY which continues to chop away at stop losses on the topside, the market currently is eyeing this months high of ¥143.

Down-under, Aussie inflation data was in line with the previous report, coming in at +2.7%, y/y, which is at the high end of RBA’s target range. The recent pickup in prices is reason enough to have probably kept the RBA and Governor Stevens from talking down the currency ($0.9230) in recent months. The fixed income traders believe that the apparent build-up in inflation may influence the RBA to hike rates at least once before the end of 2014 (+2.50%). In China it started as a rumor of disbelief, but is now a public fact, Chinese financial institutions are not sitting pretty. All of China’s top 5 banks have now reported last year’s financial results and to the trained eye they are somewhat “alarming.” Despite an increase in year-over-year net profits for a few, there were reported impairment losses while return on earning’s declined. Even more disconcerting was that China’s top five banks saw a +127% increase in bad debts to +CNY59B. It’s a manageable sum for the world’s second largest economy, but a worrying trend. This quarter is starting hot and can only get hotter!

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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