It’s hard to pinpoint the exact reason behind the sell-off in the US yesterday.While ‘tapering’ fears have bandied around, this doesn’t quite marry up with the gains seen in gold, US treasuries and the fall in the USD.
Boston Fed president Eric Rosengren also spoke, and while he is a known dove, his comments about it being too soon to cut the pace of purchases (although could look to do so after a period of strong economic data) echoed that of the core of the Fed. It seems we now have a consensus building, and after a period of differing opinions, the key voting personnel seem to be content to leave things as planned, adjusting if necessary as and when the data gives them the green light. The steepening in the US yield curve (the difference between two- and ten-year bonds) to 188 basis points is widely in focus now, and at the highest level since April 2012. Surely this will be an on-going thematic that the front-end remains anchored, while the longer-end of the curve reacts to future normalising of policy.
As said yesterday, EUR/USD continues to trade in the 1.28 to 1.30 range and we feel the pair isn’t ready to break this just yet. Yesterday’s German CPI print (+1.7%) was hotter-than-forecast, however importantly it remains subdued. The ECB will be keeping an eye on German inflation with a keen interest, because a continued move higher (in-line with views of a second half recovery in Europe), would cause a serious headache when peripheral Europe is still in a disinflationary spiral. Still, it highlights from an inflation perspective that one central bank managing seventeen economies is a tough gig, and ultimately the ECB will have to bend to Germany and move away from its accommodative policy. If Germany’s economics pick up, the rest of Europe has to follow or the ECB will have a big problem at hand.
Asian equities have generally beenheavily offered, with the Nikkei trading to a low of 13555 (down 5.4%)and USD/JPY hitting 100.585. We have been bullish on USD/JPY for some time and feel the pair can go higher, but we have reverted to the sidelines for now as the price action is all over the place. Most JPY traders are simply watching the Nikkei, which seems to be leading everything in Asia right now, although the USD/JPY will want to see a monthly close above the monthly ichimoku cloud at 100.19 (the first in years) if the pair is to continue marching higher. One just has to look at Fast Retailing (ticker 9983), it has a 10% weight on the index and fell around 9% , taking 124 points out of the index alone
Worryingly, we saw the Japanese weekly cross border fund flows (released pre-market) and Japanese investors have once again sold a huge amount of foreign bonds and equities. This is the second week this has happened, and the net selling of bonds actually increased in size and at ¥1.12 trillion, which was the second biggest net sale since April 2012! Comments later in the day from BoJ Head Kuroda were quite poignant, suggesting the rise in yields would be negative for lenders, and you can understand why the Japanese banking sector is down 18% and nearly in bear market territory. Well, it’s soon likely to be negative for borrowers too as reports are surfacing that bank is set to put up mortgage rates. The BoJ Head also suggested that inflation expectations are rising, and thus real interest rates (i.e. the bond rate when adjusted for inflation expectations) are falling, although he wasn’t sure if they were negative yet. As we have been arguing, it is imperative that the BoJ creates negative real rates to encourage traders out of the JPY and promote the currency as the market preferred funding currency.
AUD/JPY looks very shaky, and as we pointed out earlier in the week it could head much lower, potentially even down to the 200-day moving average now at 91.25. The pair has broken convincingly below the daily I-cloud now, although the immediate focus is on the recent double bottom and lows from March at 96.97 to 96.91. News that Japanese investors are dumping Aussie assets to the tune of $16 billion in the five months in March has been widely talked about on the floors today, and it seems the Japanese don’t want to be leveraged to a central bank that could cut further, especially when iron ore is in a text book downtrend.
Today’s Australian capex numbers saw AUD/USD under pressure initially after the miss to the Q1 with the pair falling to 0.9583. Clearly this was a function of algorithm reacting to the weak print (down 4.7% versus consensus of +0.5%), because most in the market weren’t that concerned with these numbers and of course wanted to see the second estimate of intensions for 2013/14. This revision improved a touch from the first estimate to $156.5 billion, which, when you adjust for estimation errors (the banks use a five-year realisation ratio) implies a 10% gain on the current fiscal year. The fact that AUD/USD rallied to 0.9692 shows a realisation that capital expenditure is not so bad and certainly not falling off a cliff, which of course some are positioned for.
Europe should see a poor open, perhaps more a function of where US futures are in relation to the European equity cash session and weak Japanese markets. However, momentum is once again to the downside, with most market closing near their lows. Data is light with UK nationwide house price numbers an hour before the equity market opens, while Spanish GDP and inflation will also be in focus. US GDP (final read) is not expected to change from the prior reading of 2.5%, and we would not expect this to be a major source of volatility.