For those living under a rock, we have a trio of important central bank meetings on tap for Thursday, starting with the most anticipated BoJ meeting in modern history and then less pivotal, if still interesting ECB and BoE meetings.
The EU situation continues to simmer along. In Italy, the scandal-ridden and insolvent bank Monte Paschi is seeing deposit flight and a ban on shorting its shares (though there isn’t much left to short as the shares trade below 20 Euro cents/share ). But despite all of the latest negative energy emanating from the EU, whether it’s Der Spiegel’s coverage of Holland’s increasingly precarious economic situation or the new record high unemployment rate posted for February yesterday, peripheral bond market spreads have actually improved smartly since yesterday morning, so there’s little evidence “on the ground” that we need to rush into fresh Euro shorts and the market would seem to be well positioned for negative EU news in the shortest term. Still, the single currency looks technically vulnerable if we remain below the 1.2900/50 area short term and we’re not far off that 1.2750 support. I suspect the tactical situation could see two way risks before we move lower.
The stronger than expected services-sector surveys out of China and a supportive trade balance number kept Aussie well supported overnight as AUD/USD continues to mull the 1.0500 level -- it’s an important resistance in my view. Tonight’s data will weigh heavily in that regard as well, though it’s up to the bigger picture for what will sway Aussie either way. It’s interesting to note for Aussie traders that Australia’s most followed stock index, the ASX200, is well off the highs of the year from a few weeks ago - surprised this hasn’t weighed on Aussie more, as the market may be taking its eye off the ball a bit too much. Aussie will have a hard time rallying any further if the Aussie stock market continues to underperform and there is nothing to drive rate spreads more in Aussie’s favour . Aussie traders should also note the collapsing metals prices with interest. In the next 24 hours, the AUDJPY cross will be particularly interesting as well due to the BoJ meeting.
BoJ – Finally Here
The menu of policy moves by the BoJ as its two-day meeting winds down tomorrow (pre-Euro opening, of course, due to time change.) is important and there are many details, as this Business Insider post discusses. But in the end, the market’s positioning and sentiment once the result is known will be the deciding factor.
In broad strokes, look for the BoJ to officially abandon the odd “banknote rule” which states that the BoJ can’t buy more JGB’s than there are yen-notes in circulation. Also look for a move all the way out the JGB curve (BoJ previously limited to three-year or shorter maturities). Then there is the overall size of the programme -- with expectations that the BoJ will increase its monthly purchases to ¥5 trillion or more (that’s the baseline expectation).
Remember that in the case of the U.S. Fed’s QE2 move back in 2010, interest rates actually rose practically from the day QE2 was announced, as bond traders thoroughly front-run the actual Fed buying. 10- and 20-year JGB yields are near all-time lows as we head into tonight’s meeting -- so we might see a similar dynamic, which could mean interest rate spreads actually tighten again if other government bond markets are well supported and JGB yields drift back slightly higher.
Since the large JPY move has taken place and attracted unwanted international attention -- particularly from South Korea, we can expect a tendency by BoJ and government officials to only discuss inflation/deflation and to not discuss the currency, though it would certainly be interesting to see what happens if the JPY moved sharply higher in coming days if the BoJ’s moves at this meeting underwhelm the market’s expectations or sentiment.
Also In The Pipeline: ADP, ISM, ECB And BoE
We have the U.S. ADP employment change data point is up later today, with expectations for a relatively robust +200k, though this number plays second fiddle to the Friday employment data. Also up is the US ISM Non-manufacturing survey, which posted a very strong reading of 56.0 last month -- any drop will be seen as setting a trend in US data disappointments due to a string of other disappointing data.
The ECB meeting is important as we see how Draghi plays his cards when most of the EU tensions are politically derived. He’ll try to shore up confidence somehow, especially on the solidity of the banking system and discouraging the idea that deposits are at risk. We could also see further indications that inflation is off the table and a therefore a setup for a rate cut in May. I expect nothing out of the BoE -- but if they do something between now and the arrival of Carney, it will most likely be tomorrow and come in the form of an incremental increase of the asset purchase target.
Economic Data Highlights
- Australia Feb. New Home Sales fell -5.3% MoM
- Australia Feb. Trade Balance out at -178M vs. -1000M expected and -1215M in Jan.
- China Mar. Non-manufacturing PMI out at 55.6 vs. 54.5 in Feb.
- China Mar. HSBC Services PMI out at 54.3 vs. 52.1 in Feb.
- Norway Mar. Norway PMI out at 50.1 vs. 49.0 expected and 48.4 in Feb.
- UK Mar. Construction PMI (0830)
- Euro Zone Mar. CPI Estimate (0900)
- UK BoE’s Haldane to Speak (1000)
- US Mar. ADP Employment Change (1215)
- US Mar. ISM Non-manufacturing Survey (1400)
- US Weekly DoE Crude Oil and Product Inventories (1430)
- US Fed’s Williams to Speak (1930)
- US Fed’s Bullard to Speak (2100)
- Australia Mar. AiG Performance of Services Index (2230)
- Australia Feb. Building Approvals (0030)
- Australia Feb. Retail Sales (0030)
- Japan BoJ Rate/Policy Decision and possible Kuroda Press Conference (0400)