A less dovish Draghi came and went yesterday. The Bank of England stood "pat," while the Bank of Japan’s Kuroda delivered. EUR positions have been squeezed on either side of the current range, but a surging EUR/JPY has left the "single" currency net higher ahead of today’s U.S. payroll release. A percentage of the market is now expecting an increase in outflows from Japan - triggered by the BOJ’s decision to effectively crowd the domestic investor out of any new JGB issuance - will prove even more supportive for the 17-member currency.
With sterling, the market was initially unsure, however, their March service PMI beating expectations may end up helping the U.K. economy avoid a triple-dip recession also had the pound trading higher by day’s end.
Yen it was easy - just sell and sell some more as the BoJ means business. Their newly laid out bond-buying program is twice as big as the Fed’s. It may not work to beat their 15-year deflation record, but Kuroda and company seem intent to go down swinging.
The BoJ pledge of aggressive buying has caused Japanese Government Bonds (JGB) to rally violently and flatten their yield curve. Low Japanese yields should push domestic investment funds to seek better returns farther afield with U.S. Treasuries the most likely destination. Governor Kuroda’s strategy has caused the yen to plummet outright (96.28) and on the crosses, a clear signal that the BoJ’s initial moves have indeed lived up to market expectations.
The decision to switch the policy target to base money from the overnight call rate is considered “unexpectedly bold.” Kuroda and company have pledged to achieve a +2% inflation target in about two years, while vowing to adjust monetary policy further if needed. Credit when due: the BoJ has cleared its first hurdle. Now we have to wait and see if these new measures are capable of pulling the Japanese economy out of the economic doldrums.
Meanwhile, concerns have risen this week about U.S. economic growth momentum. The market is now worried that today’s U.S non-farm payroll report release will come in much weaker than expected (+200K) following the disappointing ADP National Employment Report and yesterday’s weekly jobless claims release. A poor U.S. jobs report will certainly knock the BoJ dollar-yen fueled rally violently and quickly. However, market consensus believes that the aggressive shift in BoJ policy is likely to significantly affect the “traditional dollar dynamics.” With this in mind, the current downside risk in USD/JPY is likely to be very limited, as the Japanese domestic investors will likely view any data-driven dollar dip as an excuse to add to market long positions. An NFP headline print outcome below +165K should be seen as a significant negative surprise. An outcome close to market consensus will now probably be considered a positive one.
In Canada, where the loonie has been confined to the lower end of the dollar-contained range, there are employment report concerns as well. The market is expecting a +6K increase in jobs in March, down sharply from February’s massive +50.7k print. Analysts anticipate that the housing slowdown will end up being the key driver for a lower employment number. The Canadian Ivey PMI is also released later this morning and any signs in deterioration in growth momentum would not be too much of a surprise. The CAD has done well in this week’s melee, both as a risk and Tier II reserve proxy; however, any weak data this morning could have the loonie bulls looking to pare some of their position near this week's CAD highs.
Once this morning employment reports are out of the way, the market will be focusing more on sentiment indicators along with retail sales.