Intraday Market Thoughts Archives

Fear gripped Wall Street on Thursday but it didn't spill over to FX. The yen was the top performer while the loonie lagged. The BOJ minutes and Chinese CPI are due later. 1 of 2 EURUSD Premium longs from last Thursday's post-ECB conference entry hit its final 1.3890 target from 1.3710 entry. The other final target loons close. Both USDCHF and 1 USDCAD remain in progress as do USDJPY, AUDNZD and AUDCAD. All these trades are in the existing Premium Insights.

The USD/JPY performance on Thursday was impressive. The S&P 500 was battered, falling 39 points and Treasury yields continued to wilt, yet the pair fell only 50 pips on the day to 101.45.

There is a zone of major support at the March lows of 102.20 extending down to the 200-day moving average at 101.81 but there was no appetite to challenge it.

Even the commodity bloc was hardly moved by the pain elsewhere. USD/CAD was the only pair that showed any kind of reaction as stocks opened flat and then slowly bled lower. Still, the pair only climbed to 1.0933 from 1.0890 and it came after three weeks of selling.

The selloff wasn't based on new US news. The lone report was initial jobless claims and it was the best reading since 2007 at 300K compared to 320K expected. The culprits of weather, the lack of a snap-back in Spring data and overvalued tech stocks were cited but that's hardly new information.

Instead, we look to China. Trade balances numbers were worrisome – although not as scary as the initial headlines suggested because of over-invoicing a year ago.

What scares the market is that Chinese officials are looking like they want to shake out their own economy. Premier Li ruled out any stimulus in a speech and said somewhat lower growth is tolerable. That's the equivalent of Yellen saying the Fed will no longer come to the rescue of the US economy.

The Australian dollar is at the largest risk but with the RBA shifting toward a hawkish bias and strong jobs numbers, it's not the right time to fight the momentum.

The unwillingness of Chinese officials to launch any kind of stimulus makes today's China CPI report at 0230 GMT less important. The consensus is a 2.4% y/y rise. The BOJ minutes from March 10-11 are also unlikely to jolt markets in the 0050 GMT release.

The FOMC minutes emphasized patience before rate hikes, sending the US dollar spiralling lower. The Canadian dollar was the top performer while the yen lagged. Up later it's the Australian jobs report with AUD/USD hovering near a five-month high.

The market wanted a sense of when the first Fed rate hike will come after Yellen's “six-month” comment. Instead, the FOMC minutes made no mention of a timeline and said most participants wanted the statement to explicitly say new guidance didn't imply any change in policy intentions.

Short-dated bonds rallied hard on the minutes. June 2014 eurodollar futures – which are a proxy for Fed hike expectations – have now completely wiped out the post-Fed decline.

The dollar was broadly weaker after the report, leading a third day of EUR/USD gains. With EUR/USD above 1.3850 the ECB will be growing uncomfortable. Governing Council member Bonnici said the euro level is an issue to take into account and that negative rates remain a possibility.

At this point, the ECB will need to unleash some genuine threats of rate moves to get the market's attention, rather than vague musings.

Larger moves came in cable and NZD/USD as both broke to fresh recent highs. USD/CAD also continued down to 1.0859. The pair has fallen in 11 of the past 14 sessions and the once-crowded long trade has cleared out.

The Australian dollar will be the focus in the hours ahead. It came within a pip of 0.9400 after the FOMC minutes but apprehension about the jobs report halted the move. Last month's outsized 47.3K job gain sparked the recent rally in the pair and this time expectations are for a modest 2.5K gain. The report is due at 0230 GMT.

Other data on the schedule includes Japanese machine orders at 0050 GMT and Australian consumer inflation expectations at 0200 GMT but neither is likely to move markets.

 Will this evening's release of the FOMC minutes trigger a short-term relief in the USD?  These are the minutes from the meeting, which triggered an all-round positive USD-reaction mainly due to the FOMC announcement, which showed five members expecting 1.0% fed funds rates by end of 2015. Full charts & analysis

The way the European currencies took advantage of risk aversion on Monday was instructive. The Swiss franc was the top performer while the Australian dollar lagged. The BOJ decision is up next as USD/JPY stubbornly holds 103.00. 

The market was searching for a theme early in the week but a wave of risk aversion in US trading sparked a flurry of activity. The S&P 500 fell sharply for the second day on economic and valuation concerns but the bond market was a bigger concern for FX.

US Treasury yields continue to back away from key levels and short-dated maturities are at the lowest yields since Yellen talked about hiking rates 6 months after QE. Alone, that shows the market is taking a more nuanced view on when rates will go up. It certainly won't be until the economy is growing at a 3% pace and that won't come until economic data picks up.

The dollar softened broadly on the rates and economic view but the main beneficiaries were the European currencies. First, it suggests continued inflows into periphery assets. The ECB's Nouy said markets are underestimating the health of European financials but optimism is growing.

What happens next at the ECB and BOE will drive trading in the euro and pound but in the absence of news, the market was more focused on US malaise. That kind of focus could continue on slow news days.

One place where the USD selloff couldn't get any traction was USD/JPY as 103.00 acted like a steel floor rejecting three attempts. The market was apprehensive to take a position ahead of the BOJ announcement, which will be made between 0230 GMT and 0330 GMT.

There is no prospect for a BOJ move but the market wants to get a sense of how likely more QE is if economic data disappoints following the consumption tax hike. The dovish case at the moment is a hike in ETF buying in July. If Kuroda takes a more wait-and-see approach in his press conference, look for stops below 103.00.

Look at LIBOR spreads and real short-term yield differentials in order to understand the so-called mystery of the euro's outperformance relative to the US dollar over the last 6 months. Charts & analysis here

ECB officials gave some stronger hints about easing after Draghi's speech in moves that will ramp up rate cut speculation in the month ahead. Last week the Canadian dollar led the way while commodity cousin NZD lagged in an unusual dichotomy. Positioning data showed a surge of JPY shorts.  

Draghi may have sent two of his top deputies out on Friday with dovish messages. Coeure told the French press the recovery was fragile and said the ECB wants “to accompany it with low, indeed lower interest rates, over a prolonged period.” Coeure's comment came late in the day or it may have had a more pronounced effect on the euro.

ECB #2 Constancio said the near future will be very important to see if inflation has bottomed out and pointed to the next round of ECB staff projections. A German press report said the ECB has also modeled 1 trillion euros in QE, showing that the idea is well-past the discussion stage.

The calendar is light to start the week as the BOJ begins its two-day meeting. Note that China is closed for holiday.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

• EUR +33 vs +40K prior
• JPY -89K vs -69K prior
• GBP +34K vs +30K prior
• AUD -5K vs -21K prior
• CAD -37K vs -33K prior
• NZD +18K vs +18K prior
• CHF +14K vs +15K prior

The jump in yen shorts shows the market isn't waiting around to see how the consumption tax hike implemented on April 1 will affect the economy. The yen trade had gone quiet for a period but it's sprung back to life. The move into euro positions was poorly timed ahead of the ECB as Draghi managed to walk a fine line. Comments from Constancio and Coeure on Friday added to the bearish case.