We’re going into the end of month and end of quarter, as well as the end of the Japanese financial year – all ahead of an extended Easter holiday weekend for Europe and a critical Bank of Japan meeting next week.
Cyprus aftermath
The uproar over Dijsselbloem’s not-so-clever comments (see this great Felix Salmon piece from Reuters on how ill-advised the Dutch Finance Minister comments were.) on Cyprus serving as a “template” for the rest of the EU did severe further damage to trust across the EU and in the Euro and has raised the risk of on-going capital flows to safer havens. Of course, Dijsselbloem is now trying to roll back his comments, but it’s too late – they’re already out there. The USD and GBP are getting some of that flow from this, it appears, though the market doesn’t want to pick a fight with the SNB again, judging from EURCHF’s inability to consistently work below 1.2200.
Japan rising?
Japanese data overnight is encouraging for Abenomics cheerleaders, as the Small Business Confidence survey continues its surge and posted a post-GFC high and is near the top of its historic range – the current level is 49.7 relative to GFC low of 25 and post-80’s bubble highs of 51.5 (from 2006). The previous recent peak was just before Fukushima at 49.5. As well, some of the higher inflation expectations may be filtering into corporate service prices, which posted close to their highest rise since the GFC at +0.1% YoY. Back in 2007-08, service prices were running above +1.0% YoY, perhaps due to the acceleration in price inputs for commodities from abroad and due to the weak JPY then – recall that USDJPY topped out in 2007 at over 120 and EURJPY just missed 170 (!!) in August of 2008 before crashing below 115 in October.
JPY crosses bounced after yesterday’s probe lower on risk aversion as Kuroda was also out overnight talking up hopes to reach the 2% inflation target within 2 years and promise to buy more JGB’s. It’s more than ironic to see how Japanese long rates are plummeting as the currency weakens and inflation supposedly gets priced in: 10-year JGB’s are closing in on their all-time low yield (there was a spike low to 44 basis points back in 2003, currently the yield is 54 basis points) in anticipation of a wall of BoJ buying. Remember the Fed’s QE2, however, when the actual beginning of Fed bond-buying marked the low point in yields for several months.
Looking ahead
Let’s see if the near-term Cyprus-situation-driven panic cools or keeps up a head of steam – again, my main bone to pick with the current market is the degree to which generalized risk appetite has remained relatively unfazed given the stakes of what is going on. There may be an end of quarter aspect to this as we head into the weekend and some market participants are chasing benchmarks. Again, given that this will be an extended Easter weekend and end of quarter and end of Japanese financial year while we have seen huge moves in asset markets this quarter, we can expect near term volatility to remain very high. Also remember that we have a critical Bank of Japan meeting next week that will test the mettle of currency traders expectations versus reality and positioning.
I will be especially keeping my eye on the commodity currencies as we transition to a new month/quarter next week – looking for signs of weakness. The most straightforward set-up at the moment is USDCAD, which needs to pivot back higher soon if it wants to salvage the stalled rally – 1.0180 is the key near-term support there, with “final” support down at 1.0100.
Chart: USDCAD
USDCAD has found support at a key 0.382 Fibo – that may give way in the near term intraday, but structurally, I’m looking for support soon ahead of the 1.0100 ultimate support to keep the rally alive. Note the 55-day moving average creeping up toward that level as well.
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Economic Data Highlights
- New Zealand Feb. Trade Balance out at
- Japan Feb. Corporate Service Price Index out at +0.1% YoY vs. 0.0% expected and -0.2% in Jan.
- Japan Mar. Small Business Confidence out at 49.7 vs. 46.0 in Feb.
- France Mar. Consumer Confidence out at 84 vs. 86 expected and 86 in Feb.
- Sweden Feb. PPI out at -0.4% MoM and -3.7% YoY vs. -2.9% YoY in Jan.
- UK Mar. CBI Reported Sales (1100)
- US Feb. Durable Goods Orders (1230)
- US Mar. Richmond Fed Manufacturing Index (1400)
- US Mar. Consumer Confidence (1400)
- US Feb. New Home Sales (1400)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Mar. ANZ Business Confidence (0000)