Despite most forex and Japanese equity players being transfixed on perhaps one of the most eagerly-awaited central bank meetings for some time, there are still some very interesting thematics which are gripping other parts of capital markets. Perhaps for us, the other two key talking points are the ever-changing repricing of Fed expectations from the constant barrage of narrative from various central bankers, and the clear disdain for commodities.
Perhaps the falls in commodities can be linked to a longer-term view of a normalisation of Fed policy, while you also can’t argue with the supply/demand equation either, which for many commodities is showing a worrying build-up of inventory. You can see it in the softs with corn, soybeans or wheat in bear market territory, or in the precious metals space with gold taking out the February 21 low of $1555 and silver heading for key support (see chart) at $26.08. Then of course you have CME copper which has dropped from $3.80p/lb (per pound) on February 4 to its current level at $3.32. Clearly this is a space where the hedge funds are building up some very healthy short positions, amid a backdrop of limited brave contrarians.
On the Fed side, we heard comments from Charles Evans yesterday who tweaked his outlook and announced the board could look to taper the pace on bond buying before year-end. While yesterday we heard from San Francisco president John Williams (who is a well-known dove), who now also has a similar view on the US economy, arguing that 2013 could be the year we see the rate of purchases decline. This is a view that both Ben Bernanke and Bill Dudley share as well, although they would rather keep asset purchases going for the full year. Either way there is a definitive and transparent stance being shown by the Fed, which, given the magnitude and reliance the market has shown on stimulus, should be welcomed by traders and investment managers. The raft of speakers continues tonight with Charles Evans and Dennis Lockhart once again appearing in a two-way discussion in Ohio, while Ben Bernanke speaks in a taped interview on the economy. Kansas City president Esther George speaks just after and she is an uber-hawk, while the star of the show will probably be the Fed Chairman Janet Yellen who speaks an hour after the S&P 500 closes.
Asian markets have been generally offered today, feeding off the falls in the US and Europe. In Australia, the index started off on a dour note, although it tried half-heartedly to make an attempt to rally after some very strong February building approval and retail sales numbers, but could not sustain the goodwill. Chatter among traders was that a large sell order had been executed through the market by a fund. With Glenn Stevens sticking around at the helm of the RBA, he will be looking at these numbers with a degree of optimism that the non-mining sector can pick up the slack from the peak in mining investment. What’s more, there were good revisions to the January numbers as well; all-in-all the Aussie retailer seems quite content right now, with the pace of spend this year running at a healthy 4.6%.
Just as Australia was closing the BoJ hit the market and clearly delivered. USD/JPY traded from 92.92 to hit a high of 94.31, while AUD/JPY moved 139 pips. We knew Mr Kuroda was more in tune with FX markets than most given his previous roles, but it seems he went above and beyond despite calls for ‘sell the fact’. There has been a firm commitment to ease until 2% is stably achieved, while the old Rinban operation will be merged with the newer Asset-Purchase program. The bank will increase its duration of bond buying and will ramp up its gross monthly purchase amount to around ¥7 trillion, above the markets consensus. Trader should see this as the ‘regime change’ that Deputy Governor Iwata spoke about recently.
European markets should attract modest sellers on the open, although traders may find solace in the strong moves in the Nikkei in late trade. On the docket we get reads on services PMI in Europe and in the US jobless claims, which as we know will be in full focus given their direct link to future bond buying.
The ECB meeting could be the key factor today, and certainly should in theory invoke more volatility than the BoE meeting. We will be watching whether Mario Draghi removes his ‘broadly balanced’ mantra with regards to inflation, given the continued weak PMI data and drop in sentiment.
Although while Mr Draghi may detail the bank have had another firm discussion around easing, perhaps a positive signal for easing could come at a later date. We feel Mr Draghi will actually try and use soothing words to raise confidence, and detail the tools which it has at its disposal to curb any future bank runs. Given this belief, and the fact the market is running short EUR positions into the meeting, we could see a short-term bounce in EUR/USD, and thus the bulls would want to see a move through the 200-day at 1.2892, ahead of the post Cyprus high if 1.3050. The Spanish Tesoro will try and tap the market when it auctions three-, five- and seven-year bonds, and a good bid to cover could also help.
Interestingly, a look at the US dollar index (around 57% weighted towards EUR/USD) is showing good divergence, with the index making a series of higher highs of late. However, this is not mirrored by the RSIs which are showing lower highs; a classic sign that a reversal could be on the cards.