Likely in anticipation of the coming sales tax hike on April 1 and amid signs that its efforts thus far are seeing slowing momentum, the Bank of Japan (BoJ) decided to tinker with its programmes overnight. The overall monetary base target was kept unchanged, but the BoJ decided to double to JPY 7 trillion the size of a bank lending tool that allows banks to borrow at particularly low rates. It also and extended this and a related facility by another year. As this Bloomberg article states, however, “At the same time, Japanese companies are already sitting on record stockpiles of cash, signalling limits on the likely benefits from expanding the lending programs.” While the actual effects of this expansion likely would be minimal, it appears that JPY bears were desperate for an excuse to get short the JPY again, and the BoJ’s move and the technical bounce yesterday off the Ichimoku cloud bottom provided ideal excuses. Generally strong risk appetite and the S&P 500 pushing at all-time highs again are providing tail winds as well. I am somewhat sceptical of the potential for this rally — see more below in the chart comments.
Chart: USDJPY
If circumstances remain supportive, USDJPY may have a poke higher toward the upper boundary of the cloud around 104.00, while the recent lows are an important line in the sand for support. But the medium-term outlook has been clouded by this recent sell-off after new highs for the cycle failed to hold, and sentiment will be very vulnerable if this overnight rally fails today or tomorrow.
The Reserve Bank of Australia (RBA) minutes were taken as hawkish on their release, though the resulting AUD rally was quickly over and done with. The focus was on the minutes mention of a “period of stability in interest rates” and less mention of the exchange rate in helping to rebalance the Australian economy. Forward rates only ticked up two or three basis points, so there was hardly a sense of shock from these minutes, and the market is also perhaps recalling that the last two jobs reports were very weak. As well, metals backed off sharply overnight after their spike on Friday and yesterday. The January lending figures from China have reaped tremendous attention as a possible sign that China's central bank, the PBOC, is easing up on the credit clampdown, as Australia remains highly sensitive to Chinese import demand prospects.
Chart: AUDUSD
The other chart of note overnight was the AUDUSD chart, after the RBA minutes triggered a sharp rally that did not hold and was rejected. Today’s close will be key in determining whether this pair will remain capped for now. It’s interesting that the overnight rejection took place just as the pair poked its head to new highs for the year.
Looking ahead
This morning, watch for the Swedish CPI figures, as low inflation was what prompted the country's central bank, the Riksbank, to finally cut rates back in December. EURSEK has refused to fall through its 200-day moving average recently, which came in at 8.75 at the time. Looking higher, if the pair closes above the 8.88/8.90 area, the pair could be set for a try above 9.00 again.
Chart: EURSEK
This is certainly a chart in focus for today on the Swedish CPI release this morning. The upside view is constructive if we get another low CPI reading.
Elsewhere, the UK inflation data is in focus, though it will be difficult to react to this data, as the Bank of England (BoE) minutes will be up tomorrow, though the market will react to particularly surprising data either way. Some of the GBP strength of late is likely a result of the huge Vodafone/Verizon wireless deal, with potential flows continuing to work through the market through early next week.
Also note that the German ZEW survey is up late this morning and the US Empire Survey kicks off the string of regional US manufacturing surveys for February. As I discussed yesterday, the 1.3750/1.3800 zone looks important if the EURUSD is to remain capped for now.
Stay careful out there – the extreme turnaround in risk sentiment back to complacency is a red herring.
Economic Data Highlights
- Bank of Japan kept Monetary Base Target Unchanged at JPY 270 trillion as expected
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Jan. CPI (0830)
- Norway Jan. Trade Balance (0900)
- Euro Zone Dec. Current Account (0900)
- UK Jan. CPI/RPI (0930)
- Germany Feb. ZEW Survey (1000)
- Euro Zone ECB’s Linde out Speaking (1100)
- Euro Zone ECB’s Praet out Speaking (1120)
- Canada Dec. International Securities Transactions (1330)
- US Feb. Empire Manufacturing (1330)
- US Dec. TIC Flows (1400)
- Euro Zone ECB’s Nowotny to Speak (1445)
- US Feb. NAHB Housing Market Index (1500)
- Euro Zone ECB’s Liikanen to Speak (1530)
- Japan Bank of Japan’s Economic Report (0530)
- Japan Jan. Nationwide Department Store Sales (0530)