Are investors back to trading risk? U.S markets started this week under modest pressure after oil producers failed to reach a deal on an output freeze in Doha over the weekend. Naturally, the energy complex started the week gapping lower, along with the commodity sensitive bloc of currencies. Nevertheless, bargain basement hunters did appear mid-session yesterday and eventually pushed the Dow Jones Industrial average to surpass the +18k psychological mark for the first time in nearly a year.
With a relatively light week for international economic data, investors will be focusing on the many earnings reports expected this week as well as the European Central Bank (ECB).
The ECB will hold its policy meeting on Thursday. No change in policy is expected but President Mario Draghi’s press conference will be scrutinized closely as usual. Expect the ‘maestro’ to again try and talk his own his currency down.
1. Investor risk is on the rise
Both the ‘single’ currency and the pound are trading firmer, gaining in tandem with a rise in Euro and Asian equity markets, while the safe-haven yen (¥109.33) is falling broadly.
Yesterday’s oil price drop (WTI $40.11, Brent $43.13), following the failure of the Doha meeting of oil producing countries on Sunday, has quickly faded and is allowing some riskier assets to recover.
The EUR is trading up +0.2% at $1.1343, while GBP outright is up +0.3% at $1.4329.
With risk ‘premium’ costs falling, expect the market to continue to search for lagging currency pairs. Many will naturally focus on sterling as it has been beaten up on Brexit talk for some time. The pound optimist would argue that it might take persistently bad news to keep GBP near current outright levels (latest Brexit poll ORB poll- 52% for staying in EU; 43% for leaving).
Others are questioning if the EUR is losing its status as a safe haven, especially as the common currency seems to be trading in line with riskier currencies as the market heads to the U.S open.
2. RBA minutes voice-growing concern
For the Aussie currency the play of late -commodity good news ‘giveth,’ and policy makers try to take any appreciation away.
The Reserve Bank of Australia (RBA) is again “talking” its own book.
The release of the RBA’s minutes for their April meeting overnight was somewhat dovish, with a particular focus on the impact of rising AUD.
The RBA said low inflation offers room for further easing, citing that growth amongst its trading partners was “below average,” and that domestic wage pressures remain low.
Specifically highlighting the Aussie currency, the RBA said that a rising AUD could complicate economic rebalancing and keep inflation low, adding that the services sector – the new focal point of economy – is also sensitive to exchange rates.
Be prepared, aggressive longs will be punished at some stage by the RBA.
3. Asian Central Banks out in force
The RBA was not the only central banker influencing its own currency overnight.
Comments from the Bank of Japan’s (BoJ) Kuroda matched the most pronounced USD/JPY (¥109.33) move in the overnight session.
Kuroda mentioned that -0.4% rate as the level where he saw negative interest rates potentially going, warning that their inflation trend may be affected if excessive yen appreciation continues.
Finance Minister Aso also spoke, reiterating his support for the sales tax hike in the absence of an economic shock. The Minister also downplayed calls for policy stimulus from last weekend’s earthquake, noting that the “current budget funds can still be used before discussion of an extra budget.”
The Bank of Korea (BoK) left rates on hold at +1.50% as expected. Note, the decision was once again not unanimous with one board member calling for a rate cut. The BoK’s Governor Lee did announce a 2016 GDP and inflation forecast cut to +2.8% from +3.0% and to +1.2% from +1.4% respectively. Analysts note that Lee’s policy statement was somewhat “more upbeat” however, forecasting domestic recovery continuing and consumption improving, with risks to the downside anticipated to abate somewhat in H2 of this year.
4. German data supports EUR somewhat
With little primary data for the investor to chew on, the market is trying to make more out of this morning’s German second tier data. The ZEW is not typically significantly market moving, unless of course ‘expectations’ are very much off the mark.
The EUR has rallied ‘very’ slightly higher after the German ZEW economic expectations index comes in above forecasts at 11.2 for April, compared with the consensus of around 9.0, and up from 4.3 in March.
Intraday gains are somewhat limited thus far as the data also reveals a drop in current conditions to 47.7 from 50.7. Expect the EUR to be capped ahead of Thursday’s ECB meeting.
5. U.S housing data
Housing is the theme stateside this week and the overall outlook is anticipated to be good. The market is calling for a dip in housing starts later this morning (+1.17m vs. +1.18), but not housing permits where a solid gain is expected (+1.2m vs. +1.18m). Solid gains are also expected for FHFA house price data on Thursday, gains that would underscore the importance of price appreciation in a low inflation economy. Thursday’s data should be overshadowed by Draghi’s scheduled press conference.