There is little time to waste if you want to stay within catching distance of these markets. Originally lacking direction from Wall Street, the Nikkei traded around its 13,517 close from yesterday until the BoJ announcement of unchanged policy, after which it dropped -1% – the Tokyo bourse is back to its old tricks of a percentage gain one session followed by deep heavy losses. Similarly, USD/JPY managed to drop from loftier heights (98.75 to 97.79) before bouncing back to some sense of reality (98.21). Even the front-end JGBs yields have managed to rally +1-2bp, post-BoJ, while the long end move remains largely negligible.
With Australia just back on line and China on a three-day holiday feast, Japan was always going to be the center of attention. The dollar had been on the march against a number of Asian currencies, especially after the S&P’s upgraded its credit rating outlook to stable – specifically citing the world’s largest economy strong economic performance. The main culprit has been the BoJ policy meet results. The yen has pushed back against the mighty “dollar” after the BoJ policy meet disappointed the market, leaving policy unchanged – in particular not extending its slow price fund supplying operation.
The BoJ has maintained its April policy pledge to increase the monetary base outstanding by +¥60-70-trillion per annum. Policy members refrained from enlarging its purchase of J-REIT, ETFs. In fact, they left funding terms unchanged despite the recent JGB yield volatility. Perhaps more importantly, there was no “mention about the recent turmoil in financial markets in the statement”. The post market conclusion would suggest “no material differences in views among nine board members about assessment of the economy and recent developments of financial markets.”
The tech outlook for USD/JPY remains mixed. At one point yesterday (on approach of ¥100), the newly minted offside specs that spent most of the day trying to get back onside are again underwater after the persistent price action. USD/JPY bids at ¥97.70 continues to underpin spot and with more down just below. Option prices may fill the low and influence some short-term direction. There is rumored of +¥500 -million worth of ¥99 set to expire later this morning in NY.
The Asian spillover effect has managed to infiltrate the euro session as investors remain underwhelmed by the BoJ latest announcement of not extending its fixed-rate lending program – the greenback remains on the back foot against the yen. Investors may very well be getting ahead of themselves. The BoJ under Kuroda will still be easing aggressively, "massive liquidity is expected to be injected into the Japanese economy over the coming months – easing is still at an early stage."
Global eyes will not be following Japan today; all eyes will be firmly trailing the start of the two-day German constitutional court hearings on the legality of the ECB’s OMT program. It’s also worth noting while we all focus, no ruling from the court is anticipated until after September’s federal election. The key focus for the hearing is on the questions the judges will pose as this could give some indication of the direction in which the court is leaning. A court decision is not expected for some time.
Fears that the U.S. Fed will unwind some of the monetary stimulus over the coming months is weighing on demand for U.S. debt instruments and all "strips." U.S. yields are neatly going about their business and pushing higher. Foreign bonds are not immune to the situation. This Treasury sell-off and the accompanying rise in yields – maybe indicating that the Fed is about to temper its program – is and has already “rumbled” emerging debt markets by “fanning the flames that there will be less spare cash in the financial system.” Federal Reserve Bank of St. Louis President James Bullard (who has voted this year in favor of maintaining stimulus) said that inflation below the central bank’s +2% target might warrant prolonging the “aggressive” use of bond buying to spur growth and bring down unemployment. Jobs and the unemployment rate is the Fed’s primary concern. Getting the unemployment rate down to a six handle by year's end would require a consistent print of +300k new jobs each month – Are we confident about that happening? A +300k monthly NFP print!
Forget USD/JPY’s problems, China’s slowdown concern and AUD persistent depreciation from it trade association, the mighty EUR is on the grind higher looking to test some recent EUR/USD highs. Last week Draghi was unsuccessful in feeding the what EUR bears want. From an FX perspective, the ECB’s Governing Council will need to see further “deterioration” in data in order to take further steps. Analysts note and expect that this week's forecasts point to further data resilience and maybe emphasize the call for a stronger EUR. If we were to combine this with a little “reduced euro credit risk premium, reserve diversification flows, and the ongoing improvement in the euro area current account surplus,” could the 17-member single currency could get a lift this week?
A buy EUR on dips strategy is favored. Market analysts would not be surprised to see a run through 1.3306 (June 6-high). Currently, the EUR move can be described as a slow ratchet higher but looking well supported as order boards look light on the offers but well supported on pullbacks. Markets will again begin to focus on the final CPI and output numbers tomorrow for support.