In addition to the big JPY move yesterday, EURUSD and GBPUSD saw massive technically bullish reversals yesterday after the ECB. What are we to make of these?
We’ll get to the JPY in a moment, but I was actually more interested in the reversal in the European currencies against the US Dollar yesterday as the JPY reaction pattern was rather straightforward given the magnitude of the BoJ’s shock and awe easing programme. The USD reversal weaker against Europe, on the other hand, may have had a number of culprits:
The accumulation of weak US data recently, particularly the weak ISM surveys and the suddenly terrible weekly jobless claims report just ahead of today’s employment report. This delays the anticipated timing of any possible reduction in the rate of Fed asset purchases
In the early phases of the weakening JPY, USDJPY was not the leader, as the Fed’s easing programme was so aggressive relative to other major currencies – see above point on this as well. So some of the move may have been on cross/JPY trades
If the USD can’t lead from convincingly from an economic recovery perspective, it can only lead from a safe haven perspective, and risk assets have maintained a relatively even keel, if with some degree of nervousness
As long as a lid remains on the EU situation from a systemic/debt spread perspective, there is nothing expansive to anticipate from the ECB in balance sheet terms to immediately drive the single currency weaker
Excessive short-term positioning in long USD vs. Europe trades
So that leaves the question of where to from here?
While the magnitude of the BoJ’s new easing programme has impressed, there has to be some desire to take profits now that “the cat is out of the bag” just like US bonds, after rallying like mad on the hint of QE2, started selling off once the Fed officially announced the QE2 buying programme. There were definitely signs of this overnight as JGB’s reversed hard (talk about an outside day – the overnight session’s action saw 2013’s highest high and lowest low – see the chart I poasted earlier today. The Nikkei posted a spectacular shooting star reversal and as JPY crosses have reversed sharply off their extremes. Still, the latter move is modest relative to the magnitude of yesterday’s move. From here, we have to see whether USDJPY can sustain new highs and whether JPY crosses can begin an orderly advance. If the rally fails here and we dive deeply back in the range, we could be in for a considerable bout of range trading. On the other side – there is a risk of a destabilizing rout in the JPY if domestic Japanese investors and institutions decide that the JPY is doomed and begin buying foreign assets in anticipation of further weakening. Soros and PIMCO’s Bill Gross have prominently warned on this front.
Overall, I think the magnitude of yesterday’s JPY move is warping the action across the market – sort of like a black hole’s effect on the space/time continuum, and so it is dangerous to draw too many conclusions from the EURUSD and other charts at this point. Sure, the straightforward technical interpretation of the EURUSD chart is that we saw a key reversal yesterday, one that suggests a high risk of a 1.3000 break and possible consolidation back toward 1.3100 to 1.3250. Similarly, the GBPUSD reversal suggests a follow up wave higher that would focus on 1.5400-1.5500 if the recent 1.5250/70 resistance gives way. But the “grain of salt” factor due to the JPY here has me very skeptical that I should be drawing any conclusions at the moment from charts. To the downside, watch the 1.2880/1.2850 area. If EURUSD can’t find support in here, the bears can fully re-engage. Otherwise, I am noncommittal and will look for pattern reversals from higher levels, as I still believe the bigger opportunities for EURUSD longer term lie to the downside.
The market would seem to be leaning toward a slightly disappointing payrolls data point after this week’s ADP and the last couple of poor claims reports. Remember to watch the unemployment rate. It would appear that the surprise side here is for good numbers in both the payrolls and unemployment rate. Whatever the numbers, if we go sharply risk off (beginning to look for this, as there are notable signs of fragility in asset market), then I would look for the US dollar to have a better chance of staging a comeback – and for the JPY to get more than a bit wily as well heading into this weekend.
-Look for an escalation in especially Chinese rhetoric from here on the currency wars front – Japan is not creating these policies in a vacuum.
In other news
Switzerland reported March Foreign Currency Reserves this morning – there was a +11B increase in March that suggests the SNB might have been actively selling some CHF during the worst of the post Italy and Cyprus situations. For now, EURCHF has found support at the 200-day moving average area at 1.2130.
The US benchmark 10-year yield is near its lowest level for 2013 and right on the 1.75% yield level and 200-day moving average as we head into today’s US employment report. Keep an eye on bonds, particularly if we get a strong payrolls number.
USDCAD traders – note the cataclysmic sell-off in crude oil. This has to mean something for CAD at some point – again, I think the JPY madness has traders’ eye off the ball. We’re in that critical support zone between 1.0100 and 1.0150. We need a good snap rally above 1.0185 to get traction on bullish confirmation, however. (MXN also has to be coiling for a big sell-off if crude stays soft from here and we go risk off in asset markets – stay tuned. The MXNJPY carry trade has been a popular one.) There’s a very heavy calendar of data from Canada later today that will decide which way we go here.
The Fed heir-apparent Janet Yellen said late yesterday that she fully supports the idea of adjusting QE as the outlook changes. “Adjusting the pace of asset purchases in response to the evolution of the outlook for the labor market will provide the public with information regarding the committee’s intentions and should reduce the risk of misunderstanding and market disruption as the conclusion of the program draws closer”. Other Fed officials, namely George and Fisher, were out with more hawkish rhetoric – the KC Fed’s George - two-time FOMC statement dissenter – said yesterday that Fed policy risks creating financial instability that could actually inflict harm on the labor market – interesting! She is one to watch. Fisher was out warning on the risks of eternal QE as well.
Upcoming Economic Calendar Highlights (all times GMT)
- Euro Zone Feb. Retail Sales (0900)
- Germany Feb. Factory Orders (1000)
- Canada Feb. International Merchandise Trade (1230)
- Canada Mar. Unemployment Rate and Net Change in Employment (1230)
- US Mar. Change in Nonfarm Payrolls (1230)
- US Mar. Unemployment Rate (1230)
- Canada Mar. Ivey PMI (1400)
- US Feb. Consumer Credit (1900)
- Australia Mar. AiG Performance of Construction Index (Sun 2330)
- Japan Feb. Current Account and Trade Balance (Sun 2350)