BoJ upgrades Japan’s economic outlook, but announces nothing new on the asset purchase front - and the JPY kneejerks back higher. The sterling is back on focus today as the GBP/USD is looking overambitious.
The kneejerk JPY rally to the BoJ’s non-action shouldn’t be a huge surprise, considering how rapidly the pair had squeezed back higher above 99.00 yesterday after bottoming out miles lower near 95.00 on Friday. Also helping the USDJPY back higher yesterday was the ongoing sell-off in government bonds as the US 10-year benchmark yield is closing in on to 2.25% this morning. We’ve only seen a handful of weekly closes above this yield level since August of 2011, and 2.31% is a very interesting technical level there. Meanwhile, the German Bund is only yielding 1.61% this morning, with a very interesting technical resistance (support for prices) in the 1.70/1.72% area, which was the low in 2011 and twice the high, once in 2012 and once earlier this year. These are the kinds of levels that suggest the confirmation that a bear market in bonds is underway. Critical stuff, as this has implications for governments’ behaviour and for all other asset classes, particularly equities and the Japanese yen, which can hardly thrive if yields persist in moving higher. Stay tuned.
The bond outlook is key for the JPY, as the currency may go back to probe its recent highs broadly from here now that the BoJ has not come up with anything new if asset markets stay on the defensive, and if bonds see a show of support. That is a tactical observation as the JPY will be more challenged further out if this sell-off in global bond markets proves a durable trend.
The market brushed off the upgrade of the outlook for U.S. sovereign debt to stable from negative by the S&P bond ratings agency.
Sterling in focus
The Sterling is in a bit of focus today, as it looks for direction off the latest manufacturing production data. The EUR/GBP has been a paint-drying fiesta over the last several days, with volatility focused elsewhere. The GBP/USD has become insanely ambitious and shocked the market consensus. We could see the 200-day moving average challenged there (just above the 1.5700 level) if the U.K. data is positive, but I’m waiting impatiently for signs of a reversal back into the lower range for cable.
Chart: GBPUSD
Note the importance of the 200-day moving average in the recent history of the GBP/USD chart. The bears really need a chunky sell-off back through at least 1.5500, to get the impression that the market is ready to put a lid on this pair’s ambitions.
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Looking ahead
The Antipodeans AUD and NZD continue to simply melt away, posting new lows against the U.S. dollar and even wilting back to the local support levels against the JPY. There is clearly a huge investor exodus from these currencies - perhaps some of it on the slower reserve accumulation story, but also in recognition of the weakness in many global risk asset markets (contrast the huge runup in the S&P500 over the last few days with the Hang Seng heading for its lowest close for this year and Australia equities closing in on early January levels as well. In that light, the CAD resilience against the greenback is getting a bit hard to swallow here – but we need that sharp rally there to counter the rather ugly pattern reversal from new highs that was posted recently.
Elsewhere, note how the weakness in both bonds and equities is seeing the likes of USD/ZAR at 10.25, and EUR/HUF pushing 300 again. There is a lot of movement out there in the EM trades as well. EURTRY has already seen a three figure range this morning. Stay careful out there on these trades.
The critical issue for the Euro over the next couple of days is whether the German Constitutional court decision on the constitutionality of the ECB’s OMT program is worth getting worked up about. The court is meeting today and tomorrow on the issue. The market doesn’t seem to be showing much fear on this front, suggesting the surprise potential is enormous if the court decides to make a stand on the constitutionality of the EUR/GBP.
Economic Data Highlights
- Australia May NAB Business Conditions/Confidence out at -4/-1 vs. -6/-1 in Apr.
- Japan BoJ kept 2014 Monetary Base target unchanged at ¥270T as expected
- Sweden May Headline CPI out at +0.2% MoM and -0.2% YoY vs. +0.1%/-0.3% expected, respectively and vs. -0.5% YoY in Apr.
- Sweden May core (underlying) CPI out at +0.2% MoM and +0.7% YoY vs. +0.1%/+0.7% expected, respectively and vs. +0.5% YoY in Apr.
- UK Apr. Industrial and Manufacturing Production (0830)
- US May NFIB Small Business Optimism Index (1130)
- Uk May NIESR GDP Estimate (1400)
- US Apr. Wholesale Sales/Inventories (1400)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand May Credit Card Spending (2245)
- Japan May Domestic CGPI (2350)
- Japan Apr. Machine Orders (2350)
- Australia Jun. Westpac Consumer Confidence (0030)