- Since January, the US economy has continued to send mixed signals and as a result investors continue to further delay the timing of the next rate hike
- The Reserve Bank of Australia left its benchmark rate at a record low 2% but reiterated its view that a weaker Aussie was required to allow a smooth adjustment of the economy
- In Japan, equities fell sharply amid the release of disappointing PMI figures and faltering confidence in the BoJ’s ability to address disinflationary pressures
- USD/JPY has broken the 110.67 support and is now heading towards the next one, at 110, further south a support can be found at 105.23
- European fundamentals are clearly not picking up and the ECB's quantitative easing has so far not delivered the expected results. Nonetheless, we believe that financial markets have already priced in current European difficulties.
- The euro should not weaken further as results should be appraised on a mid-term horizon. We target 1.1500 over the next few weeks
- We believe that only internal European difficulties such as Greek debt coming back in the picture and sovereignty issues can drive the single currency lower
On Monday, the greenback continued to slide further amid disappointing economic data from the world’s largest economy. Factory orders contracted 1.7%m/m in February, matching expectations, while January’s increase was revised lower to 1.2% from 1.6%. Durable goods orders contraction for February was revised lower to -3.0%m/m from -2.8% consensus and first estimate. Since the beginning of the year, the US economy continues to send mixed signals as most sectors of the economy struggle in the strong dollar and weak global demand environment. As a result, investors continue to further delay the timing of the next rate hike, increasing pressure on US treasury rates. Monetary policy sensitive 2-year yields fell to 0.72% yesterday, while the 5-year yields slipped more than 5bps to 1.18%. As a result, the probabilities - extracted from the overnight index swap - of a rate hike in April have fallen to 1.2%, while the odds for a June hike currently stand at 18%. We therefore maintain our bearish view on the US dollar. EUR/USD continued to move sideways in Tokyo, moving within its weekly range between the 1.1335 support and the 1.1438 resistance.
Peter Rosenstreich, head of market strategy: “In a uncertain environment one thing has been certain, Fed comments have driven USD volatility. In what has become confusing gamesmanship between the doves and hawks, Chicago Fed President Evans will speak today. Evans has been one of the most consistent doves on the committee and is likely to support a rate path that includes two hikes in 2016. He will be discussing key economy and monetary policy topics. There is plenty of room here for market-disrupting comment, especially considering that investors are becoming more comfortable with a rate hike in June. Fed fund futures suggest approximately a 50% probability of a 25bp raise in June, so any comments that might tip the balance could have a short term direction impact. Elsewhere, ISM non-manufacturing is expected to increase to 54.0 from 53.4 in Feb. Rebound in business activity and strong service sector payroll gains should help the survey. However, this will have a limited impact on expectations for Fed policy and therefore a limited effect on USD. We remain bearish on the USD based on a cautious Yellen and soft international conditions, decreasing the probability of rate hikes in 2016. To derail USD weakness (especially versus EM and high beta currencies) we would need a clear catalyst such as a breakdown of Greek-Troika debt negotiations or Brexit.” —
As expected, the Reserve Bank of Australia left its benchmark rate at record low 2% but reiterated its view that a weaker Aussie was required to allow a smooth adjustment of the economy. Governor Stevens said that “under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy”. The Australian dollar jumped to 0.7632 after the release of the decision as investors were expecting more dovish comments from the RBA. However, AUD/USD progressively reversed gains, sliding to 0.7590.
In Japan, equities fell sharply amid the release of disappointing PMI figures and faltering confidence in the BoJ’s ability to address disinflationary pressures. The Nikkei 225 was off 2.42%, while the broader Topix index slid 2.64% to 20,184 points. The Japanese yen rose strongly against the US dollar, up 0.93% in Tokyo. USD/JPY broke the 110.67 support and is now heading towards the next one, which lies at 110 (psychological level and previous resistance). Further south, a support can be found at 105.23.
Elsewhere, with the exception of mainland Chinese equity markets, which re-opened after a long weekend, Asian shares are blinking red across the screen. Hong Kong’s Hang Seng was off 1.54%, while in Singapore the STI slid 1.28%. The Shanghai and Shenzhen Composites were up 1.46% and 2.61% respectively. European futures are pointing to a lower open with futures on the Euro Stoxx 600 down 1.54%.
Yann Quelenn, market analyst: “Eurozone: weak retail sales expected: Financial markets expect February Eurozone retail sales to print in lower than the previous release at 0% vs 0.4% m/m in February. On an annual basis, retail sales growth should slightly diminish. Recent surveys have shown that Eurozone consumer sentiment dropped in March and it is important to note that this survey was actually carried out before the recent events in Brussels. For the time being, European fundamentals are clearly not picking up (economy keeps on contracting) and the ECB's quantitative easing has so far not delivered the expected results. It is also worth noting that the impact of lower oil prices (despite recent rebound) is threatening the inflation outlook. However, we believe that financial markets have already priced in current European difficulties. The euro should not weaken further as results should be appraised on a mid-term horizon. We believe that only internal difficulties such as Greek debt coming back in the picture and sovereignty issues can drive the single currency lower. We are maintaining our bullish position on the Euro against the greenback and we target 1.1500 over the next few weeks. The next ECB meeting on the 21st April should not trigger major moves of the EUR as the central bank is already all-in.”