Here's a quick review of the key ideas heading into the week for the EURUSD, USDJPY, GBPUSD, USDCAD, AND AUDUSD.
Prior week's good German data, better than expected rate of LTRO repayment from banks, ongoing rally in leading global stock indexes all combine to feed:
- Complacency on EU solvency risk
- EURUSD longer term momentum as the pair smashes through its 200 week EMA, breaking nearly 12 month old resistance
- Virtually all EZ economic data that doesn't come from Germany
- Last week's regional elections loss by Merkel's party reduces her ability to risk voter anger by consenting to the two things the EZ most needs from Germany to survive:
- More German cash
- German consent to print and debase the Euro
For this rally to continue it essentially needs all of the above bullish factors to stay in place. The bearish ones haven't mattered as of yet.
The most significant accomplishment from the EU is the ECB's ability to restore calm by nothing but verbal intervention. The ECB has yet to commit even one EUR to the OMT's "unlimited bond buying with conditions" because the conditions are so politically unpalatable for the one that most needs the program, Spain. Yet markets believe that when need arises the ECB and Spain will be able to reach a deal on these conditions before there is any material insolvency risk. Then again, given the Greek precedent (that the EU won't hold debtor nations to their commitments due to fear of contagion), Spain may be quick to agree to conditions on the assumption that it threatens even greater contagion risk, and so it too can continue to get aid without compliance.
Ongoing risk asset rally favors further USDJPY gains
So does Japanese economic and monetary policy, which aims to debase the JPY and send the pair to at least 100, another 25% higher
For now, not much other than the chance of either a technical correction or event that scares markets so much they bid up the JPY as carry trades unwind out of fear.
Longer term uptrend likely, but near term the pair has come very far very fast and so is vulnerable to short term corrections.
The BOJ has clearly learned from the ECB that it's possible for a central bank to move its currency for a sustained period on nothing but verbal intervention and not spend a single Yen. The BOJ announced its stimulus plan, the anticipation of which had sent the JPY down and stocks up for months, and thus far has done little but promise to take steps in the future.
Japan has concluded that deficit spending alone isn't enough, it needs radically loose monetary policy and weaker currency too. As The Telegraph's Ambrose Evans Pritchard noted here, this kind of policy saved Japan for a while in the 1930s. However Japan is taking huge risks that what happened then happens again: a race to debase with its competitors that lead to diplomatic tensions and retaliations in kind, and hyperinflation. In addition, given that Japan's debt service costs alone account for over 25% of its annual budget despite its low borrowing costs, even a small increase in those costs could leave Japan unable to service its debt without even more radical money printing that ultimately causes credit markets to lose confidence in making a real return and cut Japan off from credit at rates it can afford.
The only recent developments are bearish. These include:
UK economy doing much worse than US
BOE Governor King openly considering new stimulus
Calming in EU reduces demand for the GBP as a safe haven relative to the EUR.
Rising overall risk appetite should be bearish for the USD vs. the commodity dollars, which rank higher on the risk spectrum. However both the BOC and RBA have become a bit more dovish.
Key Data Points This Week for the AUD and CAD
Stronger than expected Canada GDP would be bearish for the pair, a weaker result would be bullish
If Australian PPI data this Friday shows low inflation, that would give the RBA more flexibility to cut rates if needed
If China manufacturing PMI is strong that's bullish for Australia, for risk appetite, and thus for the AUDUSD.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.