FX Daily Planet: London Open

FX Daily Planet: London Open

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View for the day

Asian equity markets broadly declined following last Friday’s sharp decline in the US stock market led by financials on the news of fraud charges against a major US financial institution JPY appreciated against the majors amid a 1.6% decline in the Nikkei index and USD also strengthened against the majors excluding JPY. Meanwhile, GBP became the weakest currency (-0.6% against USD) within the G-10 currencies, partly due to the opinion polls over the weekend suggesting difficulty for the Conservatives to win a majority in the May 6th election. USD/Asia broadly traded higher given the broad weakness in the Asian equities. As there were no major news suggesting an imminent CNY revaluation, USD/CNY NDFs slightly rebounded. In the FX vol space, front end vols traded higher across the board; 1-month vol in USD/JPY and EUR/JPY each rose by 0.4vols and 0.7 vols respectively with JPY strengthening in the spot market.

According to our view, both Greece’s request for EU/IMF funding and CNY revaluation have become imminent risks. Regarding Greek issue, the developments after the EU/IMF agreement on the funding plan on April 11th suggests that the main market concern is now on sovereign risk, rather than on the liquidity risk. Although only hard evidence on the implementation of the fiscal package will alter this, it should take (at least) several months to see it. Given the condition, we have become more pessimistic on the Greek situation and on EUR. Thus, in the latest FX Markets Weekly, we newly recommended EUR short against CHF and IDR. The near-term risk for this issue will be an auction for T-bills on Tuesday. Regarding CNY, as we repeatedly stated, we believe that CNY revaluation are negative for EUR and positive for commodity FX (EUR-bearish trades, in such a way, can be benefited not only by Greek issue, but also by China revaluation), CHF and JPY in the near-term, though we do not expect any sustainable moves. Beyond these two major political issues, about 20% of S&P corporates will release earnings this week and the BoC and the Riksbank will announce their rate decisions on Tuesday.


Overnight news


CNY: The China Securities Journal reported the PBoC adviror Li saying that China needs to tighten monetary policy and loosen fiscal policy. He said that M2 money supply accounts for a large portion of China’s gross domestic product and will in the long term cause pressure on the economy.
CNY: China’s Ministry of Commerce denied a newspaper report that the nation has reached an agreement with the U.S. on the yuan’s exchange rate. The Information Times yesterday cited Vice Commerce Minister Zhong as saying that a “preliminary agreement” had been reached with the U.S. for the yuan to remain “basically stable”.
CNY: China's cabinet detailed further measures to prevent speculative buying of property over the weekend, empowering commercial banks to refuse mortgages to people owning two houses already and looking to purchase more.
GBP: April Rightmove house prices rose 6.0%oya vs previous 5.3%.
GBP: Support for Liberal Democrat Clegg surged in four opinion polls over the weekend siphoning support from the Conservatives and increasing the prospect Brown could keep his job after the May 6 vote.
IMM: Aggregate IMM longs in USD declined $1bn to $3.5bn. EUR shorts shrank by almost $2bn to $9.4bn while JPY shorts increased further by $1.9bn to $7.6bn, the largest short since July 2007.
Others: The UK Prime Minister Brown called for a "special investigation" into Goldman Sach's activities saying he was "shocked" at the "moral bankruptcy" alleged against the bank. Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said.


Today’s watchlist (all times BST; +9hrs for Sydney, +8hrs for Tokyo, -5hrs for New York)


EUR: EU Monetary Affairs Commissioner Almunia speaks @7:00; Feb construction spending (%m/m, sa) @10:00 (Prev: -2.2); ECB’s Tumpel-Gugerell speaks @16:00: ECB’s Papademos speaks @18:00
USD: Citi Group for 1Q @13 :00 (JPM : -0.010, Cons : -0.002); Fed’s Evans speaks on Financial Literacy @14:00; Fed’s Chairman Bernanke gives Opening Remarks at Chicago Summit @14:00; Mar leading indicator (%m/m, sa) @15:00 (Cons: 1.0); Fed’s Duke speaks on Economic Development @14:00; Mar leading indicators (%m/m, sa) @15:00 (Cons: 1.0); IBM for 1Q @21 :03 (JPM : 1.980, Cons : 1.931)
NZD: 1Q CPI (%q/q) @23:45 (JPM: 0.6, Cons: 0.6)
JPY: Feb tertiary sector activity index (%m/m, sa) @00:50 (JPM: -1.2, Cons: -1.0)


Overnight price action


FX: JPY outperforming the most, rising 0.2% against the second strongest USD; GBP underperforming the most, falling 0.6% versus USD.
FX vol: front end vols higher across the board; 1-month vol in USD/JPY and EUR/JPY each rose by 0.4vols and 0.7vols respectively.
Commodities: oil down 1.5% to $82/barrel; gold unchanged at $1136/oz
Bonds: JGB yields falling in mid to long sectors; 7yr yields falling the most by 4bp
Equities: Asian equities plunging with the Nikkei down 1.8% and the Shanghai down 2.8%.


Technical View for the day

Goldman being hit by a fraud case could be seen as the welcome trigger to book profits in risk markets as the S&P has anyway banged its head against a massive resistance cluster at 1215/22/29 where top-projections and the 61.8 % Fibonacci-retracement from the all-time high go hand in hand. It is however far too early to call out for a major shift in sentiment as long as key-support between 1165and 1150 in the S&P500 is not taken out. But as risk markets are anyway in danger of having marked a cyclical top, a setback to the just-mentioned key-support is highly likely what would particularly put commodity currencies under increased pressure. GBP/CAD has already delivered a buy-signal with the break above pivotal resistance at 1.5616 (target 1.5948 (int. 38.2 %) whereas GBP/AUD could be the next to follow with a break above 1.6672 (target 1.7026). In general this does not constitute a major reversal of the GBP downtrend though, as covered in a separate report on Friday (Has GBP bottomed out?). The EUR on the other hand remains in a vulnerable position but only breaks below 1.3379 in EUR/USD, below weekly triangle support at 0.8677 in EUR/GBP and below key-support at 122.68 in EUR/JPY would deliver fresh sell-signals.
Research from the region you may have missed




FX Markets Weekly: The FX impact of massive fiscal tightening
https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-398945-0

Global Data Watch: It’s in the legs
https://mm.jpmorgan.com/servlet/UserDocsHelperServlet?action=openpdf&docId=GPS-399154-0

ENDS

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