The EUR/USD rally ran out of steam this morning near key 200-day moving average resistance. The USD/JPY pair posted new local lows to kick off the new financial year in Japan ahead of Thursday’s BoJ and ECB meetings.
RBA – another pat on the back
The overnight RBA meeting saw the central bank patting itself on the back again, saying that policy moves thus far continue to show an “expansionary effect” as Stevens noted that “moderate growth in private consumption spending is occurring.” Rates at the front of the Australian yield curve hardly moved on the news. The currency market seemed to feel there was enough hawkishness (reduced likelihood of further cuts) to bid the AUD higher overnight, as the recent highs near 1.0500 were challenged. The RBA did mention that easing is a possibility in the future from an inflation perspective, “should that be necessary to support demand.” This 1.0500 area in the AUD/USD is the line in the sand for now. We will most likely interact with the even more important resistance higher at 1.0600+, while there is a small technical hook for selling attempts as long as we remain below 1.0500.
US data and the USD/JPY
The weak US ISM survey yesterday was yet another weak data point that is sorely testing the strong U.S. recovery theme at the moment. The approaching Thursday BoJ meeting has also put the U.S. dollar under pressure from nervous USD/JPY selling, as the anticipation of the Fed unwinding its accommodation fades with every weak US data point. Friday’s U.S. employment report will be the big sentiment test on this front.
Looking ahead
The EUR/USD tried higher again overnight as Europe comes back from its long weekend today. It failed those new three day highs in Asia overnight, and just ahead of that interesting 200-day moving average level at 1.2885.
The next couple of days are about jockeying for position ahead of the critical test for the JPY crosses in the wake of Thursday's BoJ meeting and whether anything can be done to change the Euro sentiment. It may be a bit doubtful given that the situation is political, though it can certainly move the goalposts for a few days with rhetoric or with an interest rate cut.
As we head into the ECB meeting this week, I’ll be watching whether peripheral bond spreads head wider. After all, a number of EU peripheral countries are continuing to exceed their budget deficit targets. At the same time, they are increasingly unlikely to turn to the currently defined OMT as this would see the imposition of politically impossible further austerity. Do bond traders appreciate the risk – and wasn’t it the promise of OMT that supported the peripheral bond markets the last time around? What if the OMT “backstop” isn’t really there except in a dire emergency because it is so politically unpalatable?
Now that the JPY has moved considerably stronger off its recent lows, the BoJ has a better chance of triggering a weakening in the wake of the Thursday meeting. It is however very difficult to gauge where we are in this consolidation: we have the complicating factor of a new financial year in Japan and the overall question of how much is priced in. I still suspect that the JPY will cut stronger still before it posts new lows.
More tomorrow on the BoE. The GBP rally is running out of steam in respect of that Thursday event risk.
Economic Data Highlights
- Australia March AiG Performance of Manufacturing Index out at 44.4 vs. 45.6 in February.
- Australia March RPData House Price Index rose +1.3% MoM
- Japan February Labor Cash Earnings fell -0.7% YoY vs. -0.2% expected and +0.1% in January.
- Australia RBA left the Cash Target unchanged at 3.00% as expected.
- Sweden March Swedbank PMI Survey out at 52.1 vs. 50.6 expected and 50.9 in February.
- Switzerland March Manufacturing PMI out at 48.3 vs. 50.4 expected and 50.8 in February.
- Italy March PMI Manufacturing out at 44.5 vs. 45.3 expected and 45.8 in February.
- UK March Manufacturing PMI (0830)
- UK February Net Consumer Credit/Lending for Dwellings (0830)
- UK February Mortgage Approvals (0830)
- Eurozone Unemployment Rate (0900)
- Germany March CPI (1200)
- US February Factory Orders (1400)
- US Fed’s Kocherlakota to Speak (1700)
- US Fed’s Lockhart to Speak (1730)
- US Weekly API Crude Oil and Product Inventories (2030)
- US Fed’s Evans and Lacker to Speak (2330)
- Australia February HIA New Home Sales (0000)
- Australia February Trade Balance (0030)
- China March Non-manufacturing PMI (0100)
- Cahina March HSBC Services PMI (0145)