U.S. Yields Squeeze EUR And Yen Higher

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 |  Includes: FXA, FXB, FXC, FXE, FXF, FXY, NZDS, UDN, UUP
by: Dean Popplewell

The subtle forex squeeze remains with currency performances being mostly influenced by credit spreads so far this week. This morning's euro session has managed to follow up another night of mixed fortunes in Asia, particularly in Japan where the Nikkei has closed down -300pts at 14,300 on the back of more yen strength. Over the last four sessions the main Japanese index has managed to shed nearly -900pts. In contrast, the slide in the stateside bourses since that rather "benign" NFP report last Friday seems to have stopped - temporarily at least, as indices hold in above key double-bottom support levels. With the FOMC minutes on hand later this afternoon, together with a lack of market moving data today suggests that investors can expect to be exposed to very little market moving events today.

On the currency front, investors can expect more of the same as currencies become confined to a contained range. No hint of further easing from Governor Kuroda and company at the Bank of Japan has the JPY continuing to strengthen (¥102.00). The JPY actions have obviously weighed heavily on the Nikkei, which has closed down -2.1%. Lower USD/JPY is tracking the overall USD weakness that follows a bid in US Treasuries where the yield on the 10-year has fallen to +2.68%. The market is also mentioning broad disappointment from a neutral set of remarks from Governor Kuroda overnight, ruining expectations for more easing accompanying the release of the semi-annual outlook on prices and economy in a fortnight's time. The possibility of expanding QQE is probably close to being "nil," although "some" analysts still expect an announcement of more easing by the BoJ in July. On the flip side, any strong reading from US data could widen the yield gap between TSY/JGB's opening the way for the mighty dollar to bounce back towards ¥103 rather quickly. The market remains predominately dollar short below ¥102.30 with targets at ¥101.45 and ¥101.20 in their sights. It's worth noting historically that the month of April is usually when Asian currencies have tended to perform rather well against the "mighty" USD and so far this month it has been no different.

For the time being, the 18-member single currency is unlikely to stray too far from $1.3800 handle. The EUR it seems has returned to neutral ground, where further consolidation is to be expected. At $1.3805, it is the mid-point of the trade since mid-February. With no other data and large $1.38 option expiries expected today, a tight range is close to a certainty. One should assume some model stops have been parked above the 21-DMA and on the weaker side of the possible range. A momentum break through the $1.38 handle should quickly convince the market to possibly drift towards $1.3850-60 where some EUR sales are to be offered on the first go-around. Even the overnight collective ECB rhetoric has not been able to persuade the EUR to retreat too deeply - Noyer would like to "see the EUR a bit lower." Euro policy makers do not blame monetary policy for the currency strength that has more to do with stronger investor confidence.

The Aussie is on a tear! Overnight Australia economic data points were positive on both counts as we head into this evening's employment change release. The positive outcome managed to push the AUD to a fresh five-month high ($0.9383). February home loans rose 2.3% - the highest rate in five months - while April consumer confidence saw a sequential rise for the first time in five months as well. Reports like this fuel fears of a house price bubble that could bring forward an interest rate increase by Governor Stevens at the RBA - currently the fixed income traders have the first rate hike priced in for the middle of 2015. The next leg for the currency will depend on tonight's employment report. Consensus is looking for a new job growth number of around +5k and the unemployment rate to inch up a tad to +6.1%. A release like this could possibly keep the currency in check and cool some of the recent hot moves by the currency pair.

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