Yen Drop Slow And Methodical

by: Dean Popplewell

Historically, the first Monday after non-farm-payroll usually ends up being the quietest trading day of the month – and this Monday morning is threatening to continue on that tradition. With the various bank holidays and festivals being honored globally, it feels a stretch to get overexcited on this first day of a new week, even amongst the spatter of euro data already reported. The 17-member single currency continues to make some headway outright after French and German services sector data beat expectations. However, periphery spreads have tried to derail some of this momentum. Spanish yields have edged higher, with Italy in sympathy, after domestic data showed activity in the country’s services shrank last month (44.4 vs. 45.3, m/m), the lowest pace since last December.

The EUR is thankful that that better-than-expected data from Germany and France this morning has helped somewhat to blunt the periphery yield impact. The eurozone's services purchasing managers index for April was at 47 vs. 46.6. Despite the leg up, the euro headline data print remains consistent with another quarter of contracting activity and certainly justifies what Draghi and company set out to achieve at last week's ECB meeting. The eurozone activity is still running well below potential and risks of an “unwanted prolonged recession are still alive.”

The eurozone’s retail sales print for March eased again (-0.1%, second consecutive decline), providing more proof that weakness in the region's consumer demand will continue to hinder the 17-member currency block. In year-over-year terms, retail sales has fallen -2.4%, much steeper than the -1.7% drop reported in March. The usual litany of woes, ranging from poor consumer spending to lack of business investment, coupled with a crippling austerity program, continues to deprive the region from a “traditional source of growth.” It's no wonder that the eurozone’s sentix index has come in slightly worse than expected this morning at -15.6 compared to -15.2. This report suggests that confidence in Germany has topped and could head south over the coming months. Europe’s backbone is beginning to strain!

With limited news, the highlight for the U.S. calendar week is likely Thursday’s jobless claims report. After last week’s unexpected decline in initial claims and the somewhat better than expected April payroll report with its revisions, traders will be watching to see if the improved trend continues. Also stateside, consumer credit gets to report and a key issue is whether the U.S. consumer is spending enough. Up until now, the recent trend of credit outstanding has been weak, certainly not what Bernanke and company want to hear.

On the global front – this market is not done with Central Bank announcements. A couple of beefy commonwealth members get to show their stripes this week. The Reserve Bank of Australia (RBA) and the Bank of England (BoE) meet. Any outright down-under decisions is expected to influence the "carry trade" going forward, while the "Old Lady" should remain somewhat reserved until the new governor, ex-BoC Carney, gets to take the reins in the coming months. In Europe, economic data mainly consists of industrial production and merchandise trade data for March, while in Canada; key labor force reports will round out the week, just ahead of the G7 meet.

The yen bears will take anything – at this point they do not really care. The market bias is looking at a ¥100 test -- however short term dips cannot be ruled out. After a month of struggling to break the psychological ¥100 barrier, the bears must now feel more confident after Friday’s NFP print that another positive U.S. data print over the next two weeks could finally prove to be the catalyst that allows the market to punch through this imaginary barrier. USD/JPY quest may be made easier this time around if there are not as many option barrier plays built up just under the ¥100.

Despite Abenomics continuing to attract its share of skeptics, Bank of Japan’s Kuroda’s bold efforts to reinvigorate his economy is clearly driving improvements in sentiment and inflation expectations (April manufacturing activity – 51.1 vs. 50.4 and March IP up for the fourth straight month +0.2%, m/m), which in turn should provide a solid base for further fundamental gains. A weaker yen continues to boost export demand while household spending continues to rise and the Japanese unemployment rate falls (+4.1% vs. +4.3%). Even offbeat measures (core-core CPI) suggest that the BoJ’s drive to +2% inflation target is on the move. Golden week has provided for a tight range – however, this market remains patient and expects the ¥100 breach to gather momentum when broken.

The single currency direction this morning has mostly been influenced by cross currency play. Despite the EUR getting a mild lift on the upwardly revised service PMIs, the currency ran into a wall of dealer offers on the first go-around in the high 1.3120s. Some heavy EUR/JPY demand during the Asian session after Friday’s NFP has helped keep the EUR’s reverse on track from its low of 1.3033 late last week. Both the Tokyo and U.K. holiday have limited market interest and kept participation at a minimum. In the big picture, the EUR remains range bound – during the first sense that yen interest will wane, the EUR will lose its closest ally rather quickly. This market continues to remain a better seller on upticks for now.

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