FX Daily Planet: London Open

FX Daily Planet: London Open

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With a series of news which favored the risk markets, including Nikkei newspaper’s report for an additional monetary easing by the BoJ and Chinese Premier Wen’s confirmation for continuation of “appropriately easy monetary stance and active fiscal policy” at the National People’s Congress (NPC), as well as the successful auction for Greek 10-year government bond yesterday, Asian equity indices broadly rallied led by the Nikkei outperformance (+2.2%). Given the firm tone in equity markets, JPY weakened against the other G-10 currencies, declining 0.3% against USD. USD/Asia traded lower with KRW strength standing out. In the FX vol space, there were no major moves ahead of the release of US non-farm payrolls though JPY cross vols slightly lowered.

The Nikkei Newspaper reported this morning that the BoJ is likely to consider further monetary easing through April. However, today's report is not so surprising; indeed, our Japanese economists expected the BoJ to conduct further easing if we were to see other shock factors such as sharp JPY strengthening and/or decline in stock prices. Even in the case that additional monetary easing by the BoJ materializes in April as reported, we believe that it should not have any significant impact on JPY due to the following reasons: (1) experience in the previous QE period (Mar 01 to Mar 06) suggests that downward pressure on JPY from QE would be limited, (2) current real interest rate in Japan is higher than what it was during the previous QE period, and (3) the MoF is highly unlikely to conduct JPY-selling intervention (over the previous QE period, the MoF sold JPY42 trillion in total between 2001 and 2004).

Today, all market eyes will be on Non-farm payrolls from the US. We expect a 90K decline in payrolls, weaker than consensus of -68K. As the risk market has traded firmly despite a series of weak US figures in the past week, however, even if the payrolls come in at the weak-side of expectation, it will remain uncertain whether it will trigger a broad sell-offs in the risk markets. Furthermore, the fact that market seems to have discounted downside risks to the payrolls stemmed from the bad weather over the survey period could limit the negative impact from the weak result. Therefore, the near-term risks seem to be skewed towards rally in risk market on strong payrolls, which should favor high-beta currency at the cost of USD. Other than US payrolls, German factory orders and Greek PM Papandreou’s meeting with German Chancellor Merkel will also be points of focus today.

Overnight news

JPY: The Nikkei Newspaper reported this morning that the BoJ is likely to consider further monetary easing through April.

CNY: Chinese Premier Wen reaffirmed “appropriately easy monetary stance and active fiscal policy” and that China would seek to keep CNY basically steady at a reasonable and balanced level.

USD: Fed’s Evens said that monetary tightening is still quite a ways away.

USD: Fed’s Bulllard said that he doubts whether the Fed should continue to commit to hold rates exceptionally low for an extended period.

EUR: ECB Constancio said that FX fluctuation that could threaten the ECB’s price stability target could warrant an intervention in the FX markets”.

Today’s watchlist (all times GMT; +11hrs for Sydney, +9hrs for Tokyo, -5hrs for New York)

NOK: Jan IP (%m/m, sa) @9:00 (Cons. 0.3)

GBP: Feb PPI input (%oya) @9:30 (JPM: 7.4, Cons: 7.8); Feb PPI output (%oya) @9:30 (JPM: 3.8, Cons: 4.0)

EUR: Germany Jan factory orders (%m/m, sa) @11:00 (JPM: 1.5, Cons: 1.3)

US: Feb unemployment rate (%, sa) @13:30 (JPM: 9.9, Cons.: 9.8); Feb nonfarm payrolls (ch m/m 000s, sa) @13:30 (JPM: -90, Cons: -68); Feb average hourly earnings (%m/m, sa) @13:30 (JPM: 0.1, Cons: 0.2); Jan consumer credit (ch m/m, US$bn) @ 20:00 (Cons: -3.8)

Overnight price action

FX: JPY broadly traded lower against other G-10 currencies. USD/Asia traded lower.

FX vol: In the FX vol space, there were no major moves ahead of the release of US non-farm payrolls though JPY cross vols slightly lowered.

Commodities: Oil up 0.7%. Gold up 0.1%.

Bonds: JGB traded firmly across the curve. 10-year yield down by 1bps.

Equities: Asian equity indices broadly rallied with Nikkei outperforming (+2.2%).

Technical View for the day

With the S&P500 tackling its key-T-junction at 1125 the bulls and bears are currently in the ring trying to turn the odds in their favor. Below 1125 and as long as no decisive daily close above (i.e. above 1130) is displayed the bears remain in a favorable position as a stronger sell-off inclusive a potential break below neckline support at 1049 should be the logical conclusion. A decisive break above 1125 would on the other hand only be bullish short-term as projected targets for a major cycle top are already cutting in at 1178 and at 1215/22/28. Taken together, a stronger risk consolidation is still looming with equivalent consequences for FX markets in terms of a stronger USD and a mildly stronger JPY. Commodity currencies look to be set to extend their recent consolidation whereas EUR/USD and GBP across board seem to perform a temporary consolidation only. For the latter to change its nature it would require a break above 1.3840/71 in EUR/USD and above .15354/1.5424 in Cable.

Research from the region you may have missed

What not to do at 8:35 tomorrow morning
https://mm.jpmorgan.com/stp/t/c.do?i=C1387-3A1&u=a_p*d_382601.pdf*h_-2jg4e06
China: a fairly balanced government work report as expected; emphasizing policy continuity and flexibility

https://mm.jpmorgan.com/stp/t/c.do?i=C164D-155&u=a_p*d_382819.html*h_2tauoi4b

JPY: The story on the budget has nothing to do with the possibility of intervention

https://mm.jpmorgan.com/stp/t/c.do?i=C1357-128&u=a_p*d_382590.html*h_ur91v8j6

Nikkei newspaper reports further easing by the BoJ. Any implications for JPY?

https://mm.jpmorgan.com/stp/t/c.do?i=C15F9-128&u=a_p*d_382795.pdf*h_3bdduqnp

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