BOJ Remains On Hold, JPY Gains

As expected, the BoJ maintained the status quo at the April 7-8th meeting. The USD/JPY advanced toward the upper end of our 118.10/120.60 range before the BoJ announcement, and then pared gains without damaging any critical technical levels on the topside. We believe the BoJ will refrain from adding further stimulus later this month. We do not expect any surprise on April 30th as faster depreciation of yen is not the BoJ’s motivation at the current levels. The significant narrowing in Japan’s trade deficit, and the expansion of Japan’s current account surplus in February are encouraging, yet JPY-positive news. The USD/JPY is seen range-bound between 118.10 and 120.60/80. The daily Ichimoku cloud (118.35/93) is seen as good daily support. The option barriers are supportive of higher yen in 119.50/120.00 area today.

In US: Alcoa (NYSE:AA)’s earning in focus

Elsewhere, the greenback broadly recovered from its post-NFP weakness. According to UBS’ flow monitor; “data does not show material liquidation of longs after payrolls”. The market has not fundamentally switched direction; the positive Fed divergence is still the base case scenario. The USD-bulls remain timid however, walking into the FOMC minutes today at 19:00 BST. The insights from the March 17-18th meeting will certainly sound dovish given that the Fed dots average had been sharply pulled down to 0.625% from 1.125% on this meeting. On the equity markets, news that FedEx Corp (NYSE:FDX). agreed to buy TNT Express NV pushed the S&P index higher in New York yesterday, but US equities underperformed their European peers as the appetite remains limited before Alcoa’s earnings report due today, after the market close. The dovish expectations on the FOMC should continue lending support to US equity futures.

FTSE and GBP gain on BG deal

In the UK, the FTSE made a ballistic start to the week. The anticipations that weaker pound has certainly favoured extra narrowing in UK’s trade deficit (due on April 9th) should continue pushing the FTSE index and futures higher, however the political uncertainties and the BoE’s pre-election silence will certainly keep investors’ appetite limited at levels above 7000/60 resistance zone. The mega merger news in the oil and gas sector, as Royal Dutch Shell (LONDON:RDSa) announce plans to buy BG Group (LONDON:BG), is keeping the market well supported today.

Fading enthusiasm on a potential Greek deal

Across the Channel, EUR/USD remains sluggish as the negotiations with Greece are turning mild again. While Greece insists on claiming 287.7 billion euros for WWII reparations, Germany starts losing its patience. The deeply negative positioning in the speculative EUR futures (-226,560 contracts on March 31st) suggest there is potential for upside correction in the short-run. However the unsatisfactory progress in negotiations decreases our enthusiasm on the topside. We remain bearish below 1.09 and do not expect a rise above 1.1050/60 (50-dma resistance). As the long-term view remains strongly bearish, the EUR recovery gives interesting opportunities to strengthen the fundamental EUR-short positions.

EUR/GBP remains range-bound with strong resistance at 0.73935 (Fibonacci 38.2% on Dec’14 – Mar’15 drop. The positive company news in the UK curb the downside pressures in the pound today, however the broad sentiment remains negative on pound on the back of political uncertainties before May 7 general elections. Thursday’s BoE meeting is going to be a non-event as the BoE remains on the sidelines before elections. We see limited upside potential verse EUR and USD.

Risks of faster Swiss deflation prevail

Finally in Switzerland, the deflation has been curbed by 0.3% m/m improvement in March. If the sharp franc appreciation following the removal of EUR/CHF has been the major cause of Swiss deflation, the mid-term implications of strong franc remain implicitly dangerous. Besides preventing new investors from implementing business in Switzerland, the high CHF-denominated costs will certainly push a number of Swiss-located companies toward the exit in the coming months. The major Swiss companies’ Q1 earnings will revive another wave of stress especially on the equity markets starting from end-April, beginning May. The risk of fastening deflation is still high as the negative impacts of the strong franc will be gradually translated into lower household spending. Following the EUR/CHF removal, the immediate 20%-30% off on consumer goods has temporarily boosted the consumption; however the positive impacts of sharp drop in prices should progressively leave its place to scepticism. The rising concerns on job security and the negative interest rates will certainly not power up the Swiss consumption. In contrary, Switzerland may be at the edge of a perilous “liquidity trap”.