It’s hard to remember a week where traders in all parts of capital markets will need to think tactically, but trade nimbly. Keep your friends close, and your stops closer as they say. Whether one looks in the commodity space, with copper at a seven-month low; or corn’s 12% fall in the last few days (it’s up 0.7% today) on supply/demand issues; or in the forex market with the BoJ, RBA and ECB meetings taking centre stage ahead of Friday’s US payrolls report; there’s something for everyone. Whatever asset class, this is a huge week, and a move away from correlated markets could well be on the cards.
Japan is clearly the market in focus, with the index dropping 330 points on open (or 2.7%), before recovering as the day grew on. USD/JPY as well has traded through some key levels in the last couple of days, and as we have said in recent reports, the pair has held and closed above the base-line of the daily Ichimoku cloud since early October. It has now not only closed below this support, but also the November up-trend as well. Support is now seen at the 55-day moving average of 93.05, and the 61.8% retracement of the February to March rally at 93.08 and it will be interesting to see if it will go onto close below these levels. We remain constructive from a fundamental view, although realise the market has started the new month wanting to sell USD’s and subsequently the technicals are not marrying up at this stage.
Whether the BoJ can live up to expectations seems to be dividing the market, although some positioning post-fiscal New Year is also materialising. We still sit in the camp that the bank will meet expectations, after all, it has mentioned before that it would. There is a sizeable range of policies that have been talked about and should be announced, and one would think that Prime Minster Abe will be leaning on the bank heavily to keep the Nikkei and USD/JPY supported going into the Upper House elections in July.
The Australian equity market closed up 0.4% catching a very mild bid after the RBA statement, perhaps a function of some recent press that suggested the bank would remove its easing bias. However, the statement that accompanied the ‘no change’ verdict was a carbon copy of last month’s, and gave little indication of a change of mindset from the RBA. There were some interesting moves in AUD/USD post statement; however we feel this was predominantly driven by USD flows on the whole, notably with USD/JPY taking out stops to hit a low of 92.57.
China is down 0.4% on the day, although the focus has been on the PBOC who set today’s USD/CNY fix a chunky 88 pips lower at 6.2586. Traders then took the pair within the daily band, down to 6.2013 – a new nineteen-year low. While we do have a bullish bias on the USD over the next 12 to 18 months against most G10 currencies, USD/CNY is not so clear cut, and we can see the PBOC continuing to use the yuan as a policy tool.
So, despite Wall Street having a weak day’s trade and Japan having two, European markets should hold up OK, and it looks like they will open on a flat note. Spain may underperform and we are calling it down 0.5%, with talk that the government could revise its growth forecasts for the year to -1%, from -0.5%. While this is by no ways a positive, it’s worth remembering the Bank of Spain, European Commission and the IMF all hold more pessimistic views and expect the Spanish economy to drop 1.5% this year. Italian politics as well looks far from being resolved, with Mr Pier Luigi Bersani failing to form a government, and the President putting in place key personnel to propose a series of measures which in theory could open the way for new elections in the coming months.
On the docket in upcoming trade, we get reads on manufacturing PMI data in France and Germany (although this is a ‘final’ read and not expected to change), and unemployment out of Spain and Italy. While in the US, traders will be hoping for good numbers from factory orders, vehicle sales and ISM manufacturing for the New York region that could put some positive sentiment back into the market after yesterday’s poor ISM manufacturing print.
In the UK we get mortgage approval numbers, and while we don’t expect a huge amount of volatility from this print, it is worth highlighting the very compelling longer-term bearish set-up in cable. As you can see on the weekly chart, the pair has traded through the multi-year triangle pattern (which in theory would target 1.25 over time), while there has also been a good rejection of the series of pivot lows around 1.5270. With the pair pushing up to test this resistance again, any subsequent rejection could be a compelling entry point for shorts ahead of this week’s BoE meeting.
