Japan long-term IDR’s downgraded one notch
Fitch downgraded Japan's Long-Term Foreign and Local Currency Issuer Default Ratings to A from A+ as the government said it want to cut corporate tax rates again in FY16 after a previous cut in FY15. The government is therefore betting that growth will be sustainable over the long-term and that the Yen will remain weak to boost export as a slump in corporate tax profits will hurt harder the government’s budget. The Japanese economy ended FY15 in a pretty bad shape: industrial production contracted by 3.1%m/m or -2%y/y in February and is expected to remain below zero for March (exp. -2.3%m/m or -3.4%y/y) while retail sales released this morning came in way below expectation at -9.7%y/y verse -7.5% (or -1.9%m/m verse 0.6%). Small and medium Japanese companies are gloomy about business outlook as the April Small Business Confidence Index came in below expectation at 47.4 verse 49.
The BoJ will therefore be very sensitive to any event affecting negatively growth outlook and will monitor closely inflation expectation as well. The BoJ is expected to cut growth and inflation forecast on April 30 during its Monetary Policy Meeting. We therefore think the BoJ will not wait that weak economic outlook weighs on public expectation of inflation. However, we do not expect the central bank will increase stimulus measures at Thursday meeting and will rather wait further indications in the coming weeks.
Chinese stocks retreat temporarily
We don’t predict a sustained correction in China stocks. Shanghai Composite fell back marginally today as investors prepare for the FOMC meeting. Uncertainly from the Fed meeting is keeping FX implied volatility elevated. However, we anticipated a mildly dovish Fed statement which will support growing expectations that the Fed will not raise rate in 2015. With the Fed monetary policy side-lined and global central banks retaining ultra-loose policy we believe China stocks will continue their bullish trend on Thursday. The PBoC dropped the USD/CNY fix by 11pips to 6.1209 while USD/CNY rose to 6.22 before sharply reversing to 6.205. We expect CNY to remain resilient through this period of volatility.
Brazilian Real’s rise is accelerating
USD/BRL’s depreciation accelerates as the pair closed under the 50-dma at the beginning of last week – last time was on January 20. The dollar fell more than 12% against the real since the peak of March 20 where the exchange rate reached 3.3148 (a level last seen in April 2003) amid S&P affirmed Brazil’s investment grade rating at BBB-. Brazil’s March unemployment rate is due this afternoon and is expected to come in at 6.1% (prior 5.9%). It would be the third consecutive monthly increase in unemployment rate. UDS/BRL is currently consolidating around 2.91 as traders await the outcome of the FOMC tomorrow.
USD/BRL is falling sharply
The Risk Today
EUR/USD is in a consolidation phase since the second half of March. The break of the hourly resistance at 1.0849 (17/04/2015 high) indicates an improving short-term technical configuration. The hourly resistance at 1.0927 (27/04/2015 high) is challenged. A key resistance stands at 1.1043. Hourly supports can be found at 1.0785 (24/04/2015 low) and 1.0660 (21/04/2015 low). In the longer term, the symmetrical triangle from 2010-2014 favours further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. A strong resistance stands at 1.1114 (05/03/2015 low). Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support).
GBP/USD has broken to the upside above key resistance area between 1.5137 (09/03/2015 high) and 1.5166 (see also the declining trendline). Hourly supports can be found at 1.5166 (18/03/2015) and 1.5028 (24/04/2015 low). In the longer-term, the break of the strong support at 1.4814 opens the way for further medium-term weakness towards the strong support at 1.4231 (20/05/2010 low). A decisive break of the key resistance at 1.5166 (18/03/2015 high) is needed to invalidate this scenario. Another key resistance stands at 1.5552 (26/02/2015 high).
USD/JPY continues to consolidate near its key support at 118.18. A break of the resistance at 120.12 (intraday high, see also the declining trendline) is needed to suggest exhaustion in the selling pressures. An hourly support stands at 118.53. Another resistance can be found at 120.84 (13/04/2015 high). A long-term bullish bias is favoured as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 118.18 (16/02/2015 low), whereas a key resistance stands at 121.85 (see also the long-term declining channel).
USD/CHF continues to challenge the key support area between 0.9491 and 0.9450 (see also the 38.2% retracement). Hourly resistances can be found at 0.9628 (intraday low) and 0.9712. In the longer-term, the bullish momentum in USD/CHF has resumed after the decline linked to the removal of the EUR/CHF floor. A test of the strong resistance at 1.0240 is likely. As a result, the current weakness is seen as a countertrend move. Key supports can be found at 0.9450 (26/02/2015 low, see also the 200-day moving average) and 0.9170 (30/01/2015 low).
