Yen devalues slightlyBy Vincent-Frédéric Mivelaz
Japan’s major challenge lies in devaluing its currency. The Bank of Japan has kept its key rate in the range of 0% to -0.10% since February 2016, a measure that since the beginning of 2017 has not overpowered other factors (USD/JPY: -8.54%). But lately USD/JPY is bullish, currently at 106.98 and approaching hourly resistance at 107.90.
Although inflation is under its 2% target (1.50% as of February), and the population has a ‘deflationary’ state of mind, Japan’s economy remains solid. The Q1 Tankan manufacturing indicator came in at 24, February’s balance of payments recovered from recent December-January declines to JPY 2’076 billion (USD 19.5 billion). The largest contributor is Goods and Services +3’114 (previous: -8’348). These was a slight decline in business sentiment and private consumption was nearly flat, but consumer confidence remains strong for March – at a 5-year high, confirming optimism of economic growth.
Trade-war news drives marketsBy Peter Rosenstreich
Will protectionism derail global growth? At this point, we think not, but still, ‘trade war’ headlines are messing with markets. Granted, recent data from purchasing managers suggests growth is decelerating, but not catastrophically.
Chinese President Xi Jinping’s took some heat out of the rhetoric in a major speech. His decision not to tit-for-tat was welcomed by Asian markets, with equities up across the board. Unfortunately, US President Donald Trump might not relax his populist tariff talk. We remain long volatility and caution USD shorts, as International Money Market data shows greenback shorts are close to extremes. Russia’s rouble has been slammed on falling risk appetite and the Syrian bombing, losing nearly 10% in two days. RUB’s fall is unlikely to end here.
Brazilian election uncertaintyBy Arnaud Masset
Worries that a less market-friendly candidate will take over from President Michel Temer after October’s general election are rattling Brazilian markets. International investors are always sceptical of left-wing candidates.
One indicator is CDS rates that are building upside momentum, with 10-years inching up to 272 basis points, while 5-years rose to 169 bps. In recent days, both Brazilian stocks and the BRL suffered major losses. On Monday the Bovespa index fell 1.78% to 83,307 points. The 1-month implied volatility edged above 20% to 21.85%. On Monday the real slid 1.54% to its lowest level since December last year as USD/BRL hit 3.4219. Option markets suggest traders are buying protection against further depreciation. The 6-month 25-delta risk reversal (the difference between call and put prices) jumped 45 basis points to 2.3575% amid mounting uncertainty. The interest rate differential has narrowed significantly, from around 12% in 2017 to around 5.8% today, making carry-trade less interesting.