Consolidative Tone Persists in FX

The main characteristic of the global capital markets is one of consolidation.  The two weakest currencies against the dollar, sterling and the yen, are trading firmer today.  Sterling, which finished the North American session on a firm note after falling to new 3-year lows, saw follow through short-covering, which lifted it to a three day high.   After running out of steam in Asia on Tuesday, profit-taking saw the dollar ease to test support in the JPY95.50 area in early Europe. 

The yen's recovery encouraged profit-taking in the Nikkei, which finished lower for the second consecutive session.  Equity markets more generally were lower after profit-taking was seen on Wall Street yesterday..  The MSCI Asia Pacific Index was off about 0.6%, while the Dow Jones Stoxx 600 is off 0.3% near midday in London.  The Shanghai Composite fell 1%.  At five sessions, it is experiencing its longest losing streak at least four months.  The MSCI Emerging Market Index fall Monday and Tuesday and is falling today as well. 

US Treasuries snapped a six day losing streak yesterday and look poised to recover further today, barring a major surprise with the retail sales (consensus 0.5% on the headline and 0.2% excluding autos, gasoline and building materials, which is used for GDP calculations).   European bonds are little changed, though Italian bonds were under a bit a pressure ahead of the bond auction and rose further after the lukewarm results.  

The newly elected parliament is to formally sit on Friday and elect a president in each chamber (over the weekend) and it is still not clear what happens next.  Grillo want' his 5-Star Movement (M5S)  not to support any party and instead seek a mandate to form the next government.  However, M5S does not have a prime minister candidate, so it is not clear what this means.  A new election seems necessary, but cannot be called until a new President is selected and that does not appear possible until a new government is in place.  We suspect that in the crucible of these negotiations, as Grillo and the M5S gets closer scrutiny, cracks will emerge.  Grillo's claim in today's Handelsblatt that Italy is "already de facto" outside the euro area is incomprehensible. 

The immediate focus in Japan is on the confirmation of the new BOJ team.  The only controversial element is the deputy Iwata.  While the DPJ has expressed its opposition, the other small opposition parties have reportedly signaled their intent to support him.  It is close, but the government appears to have the votes.  In the larger picture, this seems immaterial.  The BOJ is widely expected to announce large scale long government bond purchases and possibly combine the rinban operations (monthly purchases of JGBs by the BOJ) and the asset purchase program (QE).  In fact, the minutes from the BOJ meeting suggest others on the board are inclined to do so.  

Sterling is the strongest of the major currencies today and it has been a while since we have been able to write that.  There has been market talk of good demand for one month sterling calls struck near $1.55.  This could reflect 1) sterling bears buying some insurance and/or 2) bottom pickers anticipating a short squeeze ahead of the budget (March 20).  The weakness of sterling has spurred talk of rising inflation expectations.  One popular measure, the break-evens, which compares the yield of the convention instrument to the yield of the instruments linked to inflation, seems to be a bit misleading.  Anticipation of the resumption of BOE gilt purchases, could cause a widening of the spread.  We see other signals, such as in surveys, that inflation expectations are rising, but  worry that the break-evens may exaggerate it. 

The antipodeans are little changed this week, but the events over the next day may inject greater volatility.  The RBNZ rate decision is at 20:00 GMT today.  It is widely expected to leave rates on hold, but if the statement is not hawkish, pointing to a rater hike before year end, the New Zealand dollar may be sold.  A bit later, (00.30 GMT March 14) Australia reports its jobs data.  The consensus expects around a 10k increase, but disappointment in the headline or details (full time positions have fallen for the past three months), could lead to new pressure on the Australian dollar.
Consolidative Tone Persists in FX Consolidative Tone Persists in FX Reviewed by Marc Chandler on March 13, 2013 Rating: 5
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