- Weakness in Japanese stocks for the fourth straight day driven by JPY strengthening despite the 10y JGB falling to a new all-time low
- The PBoC lowered the USDCNY fixing by 0.5% to 6.4628, further easing concerns over unwanted deprecation
- We expect the government and PBoC's support for the growth target, indicated at the National People Congress, to continue to shore up Chinese stocks
- The dovish Fed will discourage USD bulls until other central banks start additional rounds of easing to offset USD weakness
- Lower US rates and risk premia should embolden capital inflows into emerging markets suggesting that the current ceasefire in global currency wars is unlikely to last
- AUDUSD bulls have rallied around the broader base metal rally with an immediate focus on 0.7740, then primary targets at 0.7850 following the commodity currencies recovery
- We anticipate near-term EUR strength on the back of the perception that the ECB has reached its limits in easing, combined with Draghi’s statement that additional actions were unlikely near-term
- EURUSD traders will target 1.1375 for a bullish extension to 1.1500
- We remain negative on USDCAD, viewing the rally as an opportunity to reload shorts to target 1.2835.
Sentiment firmed in the Asian session as regional equity indices gained broadly and the global risk rally rolled on. Following the S&P higher close, which nearly erased 2016 losses, the Shanghai composite rose 1.64%, Hang Seng rallied 0.47%, while the Nikkei was the sole decliner, dropping -1.25%. In broader terms, the MSCI Asia Pacific, with the exclusion of Japan, has rebounded 15% since mid-January. Weakness in Japanese stocks for the fourth straight day was driven by JPY strengthening despite the 10y JGB falling to a new all-time low of -0.135% (below the BoJ negative interest rate). Japanese finance minister Taro Aso indicated policy makers were watching FX moves closely, yet BoJ Policy Board minutes provided little insight into recent measures. The PBoC lowered the USDCNY fixing by 0.5% to 6.4628, further easing concerns over unwanted deprecation. We expect the government and PBoC support for the growth target, indicated at the National People Congress, to continue to shore up Chinese stocks. Elsewhere in China, February new home prices increased 3.6% y/y with big jumps in Beijing and Shanghai. USD was weaker against G10 and EM currencies (DXY at lowest level since Oct 2015) as the unexpectedly dovish fed statement continues to take its toll. US front-end yields suggest bottoming as a stronger Philly Fed survey indicated that a weaker USD would help exports, while falling volatility has encouraged USD selling. Commodities (base commodities leading the way) and commodity-linked currencies further recovered. AUDUSD bulls have rallied around the broader base metal rally with an immediate focus on 0.7740, then primary targets at 0.7850.
Yesterday, Euro area headline inflation read fell by 0.2% y/y in February. While the fall below zero was driven by the usual suspect of weak oil, there were also concerning signs of domestic weakness. Negative contributions were made in food, beverages and housing but also domestically focused categories such as restaurants and hotels. Clearly the ECB was aware of these developments as Draghi mentioned in the press conference that “low or even negative inflation rates” should be expected, a fact reflected in the ECB’s downward revision of official inflation projections. We will monitor potential second round effects on wages yet understand that recently announced measures will take some time to kick-in. Having said this, we anticipate near-term EUR strength on the back of the perception that the ECB has reached its limits in easing, combined with Draghi’s statement that additional actions were unlikely near-term. EURUSD traders will target 1.1375 for a bullish extension to 1.1500. Meanwhile, the dovish Fed will discourage USD bulls until other central banks have started additional rounds of easing to offset weak USD (part of rolling currency war). Lower US rates and risk premia should embolden capital inflows into emerging markets suggesting that the current ceasefire in global currency wars is unlikely to last.
Yesterday’s central bank rate decision line up provided little excitement and was widely expected. The BoE left rates unchanged at 0.5%; the SNB maintained with their reactionary stance and no policy action, South Africa hiked key interest rates by 25bp in a split decision, while Norway and Banks of Indonesia cut their respective deposit rates 25bp each. On the docket today Russia is expected to leave rates unchanged at 11.00%, Mexico will hold at 3.75% and Colombia is expected to raise rates 25bp.
***Yann Quelenn, market analyst, Swissquote: “Norway: Yesterday, Norges Bank lowered its deposit rates to an historic low of 0.50% from 0.75%. The Norwegian central bank is trying to foster growth in a country where a quarter of its economy depends on the oil industry. In 2015, the GDP printed at 1% y/y, down from 2.3% the previous year, mostly due to the decrease in investments. However, consumer spending and exports improved last year, both increasing 2% and 2.6% respectively. Unemployment is on the rise and even though it remains relatively low, it has jumped from 3.5% in 2014 to 4.4% in 2016. Wage growth is expected to suffer. Declining economic conditions have been sufficient to convince Norges Bank to cut rates in order to import inflation and becomes more competitive.
The main issue in this competitive devaluation is that the ECB and Sweden are following the same monetary policy. The ECB is clearly trying to further devalue the single currency and Sweden has already adopted negative rates. Competitive devaluation is pushing Norges bank to maintain the stance of its monetary policy accommodative. In addition, the end of low oil prices would have the adverse effect to strengthening the Norwegian currency. We consider that this strategy of entering into competitive devaluation is not without risk as it could damage price stability. Indeed inflation is far from being weak - 2015 CPI printed at 3.1% y/y. Hence, Norges Bank is willing to increase upside inflation risks which would remove the increased competitiveness earned from a lower Krone. Last but not least, low rates could underpin a real estate bubble.
The Norwegian economy’s outlook is clearly uncertain. There is the need to increase competitiveness by devaluing the currency to increase growth and revenues as Europe and Sweden’s monetary policy in particular are so aggressive as negative rates are still in place. In other words, Norway is currently taking a bet of sacrificing price stability for the sake of competitiveness.”***
Today several US central bankers are speaking today including Bullard, Dudley and Rosengren. The European session markets will be focused on discussions between EU leaders and Turkey Premier Minister Davutoglu over the refugee crisis. In Canada, retail sales data should see a solid bounce, further encouraging CAD bulls following the recent rally in commodity prices. We remain negative on USDCAD, viewing the rally as an opportunity to reload shorts to target 1.2835.