Many large egos gather in Davos at the World’s Economic Forum beginning today. Since the last meet and greet, capital markets have managed to witness the EUR’s survival, Washington muddling through its fiscal crises, China hopefully heading for a softer landing, and equity markets whose corporate earnings are recovering. Twelve-months ago, the IMF’s Christine Lagarde declared that Greece would have achieved a sustainable debt to GDP load of +120% by 2020. Since that declaration, the line has become somewhat blurred. The word sustainable has since been decoupled from anything to do with the country. The new target is now around +124%. Despite the globe breathing a wee bit easier, Euro periphery nations remain the "black spot" whose spreads to bunds will continue to give the EUR direction.
The market's initial response to the highly anticipated BoJ actions indicates that there is a clear scope for a further rebound in the yen. The measures announced overnight by the governor Shirakawa and company seem to have fallen short of market expectations. The BoJ set a +2% inflation target and said it will shift to U.S. Federal Reserve-style open-ended asset purchases in its strongest commitment yet to ending two decades of deflation. According to analysts, the problem is that Japanese policymakers have agreed to increase the AP program by +JPY24t in 2014, resulting in only an overall +JPY10t increase to the program. The central bank seems to be committing to the same pace of JGB buying next year despite doubling its inflation target! The voting decision was not even unanimous (7-2), and only opening up room for more doubt. These are enough reasons not to be have been wholly convinced by the central bank actions and reason enough to want to take back some profit on the “only” trade that dominated forex this year - selling yen against almost anything.
Trading the EUR outright has not been that easy this morning during the European shift. The single currency has had its fair share of objections and rumor mongering to contend with, providing for an eventful session. The EUR trading in tandem with the DAX did not help. The initial retreating DAX losses were fueled by the rumor that the German financial watchdog (Bafin) had asked two high profile German financials to separate their retail and investment banking operations, while at the same time the market was responding to rumors that the Bundesbank’s Jens Weidmann was resigning. Denial of resignations and potential breakups had the EUR recovering, doing an about-turn along with much profit taking!
Global investors should be trading more on fact, not rumor. Not doing so can provide for an expensive trading lesson! Just look at this morning’s EUR trading activity and range. Volatility is many individual's bread and butter, however, lack of substance or rumor mongering can be painful for so many. It’s preferable to stick to the market basics!
This morning’s German business confidence improved more than the market had been expecting. German ZEW managed to print a three-year high (31.5 in January, far exceeding the December print of 6.9), reaching its strongest reading in nearly two-years. This immediately gave the single unit its support back. Remember, Germany is the eurozone's backbone, and what is good for Germany does not necessarily translate to her trading partners. The economic situations for some of her largest trading partners are still considered to be weak. Although a good number, it’s still an isolated economic print.
If you are a EUR bull and managed to survive this morning’s early eurozone shenanigans, then heading into the "Stateside" session has you sitting pretty comfortably. The EUR has survived rumored resignations, option expiries and a somewhat disappointing central bank to test again its overnight highs. The overall market bias still remains on the upside, looking for a technical print close to last year's high around 1.3485. Currently, the currency pair is building a solid base towards 1.3250-60. A break below this and we will have a new range to talk about!