Any lack of movement in the capital market can drain the enthusiasm out of anyone. It is very difficult to get excited by an asset class where price movement is kept to a minimum and investors are looking for an in-depth reason to explain why they should get involved. Currently, the “big picture” has not changed; it’s the “silence that is deafening.” It's during times like these that one begins to question the opportunity cost of not getting more involved somehow. Are investors leaving too much on the table in a different asset class maybe? Unless a clear trading pattern or strong conviction occurs, sometimes it can cost an individual more by just “diddling in the middle.”
It seems that the continued calm in the U.S. Treasury market and supportive comments from China about growth have encouraged global bourses to rally a tad in the overnight session. Yesterday’s disappointing U.S. housing starts hurt the "mighty dollar," and pushed both the EUR and GBP to trade at their highest levels in over a month. Chinese Premier Li Kejiang stating that his country’s growth cannot be allowed to slip below +7%, and that a reasonable growth rate would be +7.5% has not helped the euro currencies directly, however, the commodity pack currencies in Australasia have got a temporary leg up.
Euro data is again thin on the ground and the enthusiasm for the EUR to kick on does not seem to be strong enough. For the time being, the market will be trying to play the technical range in the majors until there is a compelling enough reason not to do so. Euro indicators still remain negative with the risk-adjusted yield spread between the EU and U.S. remaining in a downtrend. Yield differentials have been a good guide for the EUR/USD moves, and after some stabilization (consistent with a higher spot move) is beginning to turn lower again. Rationally there must be a cause for caution on the EUR signals at such high levels; specs are buying near one-month highs.
Elevated EUR is at a greater risk from any downside surprise in the data. Do not be surprised to see event risk beginning to conspire against the euro bulls, especially with flash PMI/Ifo due within the next 48-hours. So far the market seems to believe that levels above 1.3200 in the EUR outright provide a good selling opportunity for a move below 1.3150. The problem with levels like this in a quiet trading range is that everyone and their mother have the same trade idea. There is a small chance that some of the EUR bears may not get a chance to witness their desired levels trade with the action occurring in front of their prices. This morning's EUR price move is good example. Investors have all wanted to sell just after and through a 1.32 print outright. Once near these, levels the single currency has traded heavy with impatient sellers adding pressure, afraid of losing their opportunity to short the EUR.
The Bank of Japan has done a good job and deserves a pat on the back. They have reigned in a market that temporarily got away from them in May. With JGBs settling down and 10-year yields closing at a 2-month low (+0.785%) yesterday, it's strong proof that Japanese policy makers have beaten back the “Bond Vigilantes” for the time being. Global rates will eventually need to be higher, but not just yet. The yen bears should be cautious. The yen rallied after PM Abe’s successful electoral win in the Upper House on the weekend. This gave his coalition government a strong majority in both houses, paving the way for a more aggressive stimulus plan. The PM’s “third arrow” does not set up for an even weaker yen automatically because this round of policy aims to promote private investments and structural changes.
Investors see better buying opportunities on USD/JPY on pullbacks, mostly as JPY short positioning has been scaled back dramatically in the past few weeks. The market seems comfortable establishing yen shorts closer to ¥99 and below for a renewed move towards ¥101.55. Through here, the pair should have the momentum to test the recent dollars highs of ¥103.75. Current levels (¥100.00) are somewhat neutral, which could mean that there is some latitude to short yen again. The biggest issue is whether the market will be given the opportunity to visit their desired yen sell levels. Many political pundits believe that significant policy changes that impact yen will probably have to wait for a further two or three months, closer to the Diet session.
The USD bulls have based their views on higher rates. In the big picture, with U.S. yields currently in retreat, emerging markets somewhat settling down and spec positioning stretched, the dollar is in danger of a further pullback at these illiquid levels. If the market squeeze has reached its limit, fundamentals may have to reassert their influence. Unfortunately today is a data free day in the U.S., but “event risk” rises sharply over the next 48-hours in euro-land with PMIs and Ifo data blazing a trail. It may be prudent to wade to the sidelines until a clearer picture prevails.