While equities moved higher through Europe and the US yesterday, our focus was more heavily weighted on the forex markets, notably EUR/USD and cable. In hindsight this was perhaps a short-sighted view because USD/JPY printed new highs and has continued to find buyers through Asia today. It seems after a brief pause the market has come back with a vengeance to sell the JPY. We have held a positive bias on USD/JPY for some time and now believe the pair can target 99.74 (the 50% retracement of the sell-off from 124.14 to 75.35) over the coming months. However, we will be wary of a ‘buy the rumour, sell the fact’ scenario playing out after the April 4 BoJ meeting.
We felt the ECB meeting could go either way, although it was clear from the fact that EUR/USD closed on Wednesday below the January 4 pivot low of 1.2998 that traders were favouring a change of language, from inflation risks are ‘finely balanced’ to ‘downside risks prevail’. This didn’t materialise, hence the reaction to $1.3100. However, what seems to really be more apparent is the growing divide between the ECB, Germany and many of the other EMU nations running, or at least supposed to be running austere budgets. And while there is certainly a discussion to ease rates, the ECB is not going to react until it sees governments enact what was previously agreed.
We have seen Italy’s Pier Luigi Bersani suggesting he wants to take Italy away from the shackles of fiscal austerity, while France has shrugged its shoulders when it missed its budget targets; one questions how interested it actually is in moving the goal posts to meet them. It seems like the most the ECB is prepared to do is support Europe through monitoring prices and keeping inflation in check. Nothing seems like it will happen until we get a sense of the changing landscape that is taking place in Europe with regard to the move away from austerity.
EUR/GBP looks positive given the recent moves and we wouldn’t rule out a move to .9000 over the coming months.
With US markets marching on, Asia has generally seen a positive day’s trade, with the Nikkei being the focal point. A couple of weeks ago we talked about traders potentially looking to run a long Nikkei/short S&P position, and that seems to be working well with the Nikkei outperforming by around five percentage points. This should continue especially with further talk that the Japanese government Pension Investment Fund is looking to re-allocate its holdings away from domestic debt and into stocks, and even foreign equities. This would of course be negative for the JPY, and then subsequently positive for the Nikkei. However, it seems there is renewed vigour to push up USD/JPY once again, perhaps because the hedge fund community has run out of other obvious trades. GBP/USD looks weak, but EUR/USD, which was on a slide has stabilised, while AUD/USD continues to look like it wants to remain range bound.
On the topic of the AUD/USD and Japan, it appears the migration from Aussie bonds looks like it is continuing with the Japanese Ministry of Finance detailing that Japanese investors pulled ¥439 billion out of Australian bond holdings in January – the most since 2005. This is a growing trend and something we will monitor because clearly the love for Australian bonds is waning, and if China or domestic data slows then AUD/USD will not get the same support it did last year when iron ore collapsed to $87.60. Today’s A$600 million tender of Aussie ten-year bonds saw a bid to cover of just over two times. A very low number by historical standards.
With Japan on a tear, Asian markets are following with strong gains seen in the Hang Seng, Kospi and more modest advances in the ASX 200. China’s trade balance numbers released mid-way through the session seemed to have a bearing of sorts, and although the headline print was good, the fact that imports fell off a cliff (down 15.2%) could be taken negatively. The market will see these distorted by Lunar New Year, thus it seems these numbers will get overlooked. It’s worth bearing in mind we get February CPI, PPI, retail sales, new Yuan loans and fixed asset investment over the weekend.
So with the flows into USD/JPY and Asian equities we have seen buyers come in through the day into our European markets. A positive tone should be seen in a market where there is still so much bullish momentum around, although the US non-farms has the premise to throw up some volatility. We would always listen to a central banker over a data release, however some data points can be just as important, in so much that the market will look to alter portfolios in attempt to front run central bank policy. This could be the case with today’s jobs report.
Expectations for the upcoming print are certainly elevated given all the usual lead indicators have been strong. The four-week moving average of the weekly claims, the employment sub-component of the services ISM and the ADP private payrolls were all good, and we feel the market is probably positioned for a number north of 165,000, which is consensus. The fact that the USD has risen in tandem with stocks of late solidifies our theory that the USD is becoming an asset/investment currency; this could hold true again today. There’s even a chance stocks sell-off on a number above 200,000 on the fears that the Fed could adopt a more hawkish tone in its March meeting. Trading around this release is clearly for the brave, and while it is not 100% clear how equities and commodities trade on the back of a good or bad print, we will stick to what we know potentially works and is the purest way to gauge a reaction to the numbers – USD/JPY or MXN/JPY.