Another day of push and pull between dollar sellers and dollar buyers generally. USD/JPY being a possible exception, as the candlesticks for that pair hints at an imminent reversal. This doesn’t need to be about the dollar, indeed I suspect in recent weeks following Kuroda’s efforts to push ahead with greater amounts of quantitative easing the market has been encouraged to take on a larger short position, than perhaps fundamentals can justify in the near term. Suffice it to say, I wouldn’t be shocked to see USD/JPY drop back towards 115 before it launches itself towards higher highs. We’ll need to see the price action today, but if we end the week looking like an evening star (strong up day 2 days ago, followed by indecision yesterday, followed by a strong down day today) then I would expect to see positions trimmed as the pattern is confirmed.
The S&P 500 made new record highs yesterday. These days I hardly know whether to bother making this point, it happens frequently enough! But it is worth noting that the market seems very comfortable with the reality that normalisation is likely to occur in mid-2015 in the United States. I’m being rather cautious by stressing “likely”, however I would probably assign it a higher probability than the market is doing right now, because I suspect the beneficial impact of lower oil prices will be keenly felt in the Eurozone and China in particular. Possibly less so in Japan, as the rate of depreciation of that currency is likely to dampen the impact of lower oil prices when translated into Japanese yen. For all the talk of the aggressive measures being taken in Japan, I still can’t get my head around who is actually supposed to benefit. I read an article in the FT yesterday where the point was made that since 2000, Japanese GDP per head has actually risen faster than in the United States! We often forget that when looking at aggregate numbers, demographics matter. And now we have policy in Japan which is unlikely to benefit the world’s oldest demographic. Call me naïve but QE might benefit the indebted Japanese government by reducing the real value of the debt, but I’m not so sure about the population. As for corporate Japan, can someone please explain to me who benefits? Large companies have already moved a sufficient proportion of their operations abroad that they are largely indifferent to the level of USD/JPY, and smaller companies don’t really export, in fact they tend to import more, so their costs are going up! Wonderful isn’t it? I’m sure there’s a clever reason for this (other than the obvious one I’ve pointed out), but I’m not seeing it…
The ECB has published the legal act for purchasing asset back securities (ABS), and the process could start as early as today. It’s worth noting that Eurozone bond yields are at record lows as inflation expectations continue to drive ECB fears about deflation. Indeed Mr Draghi has been talking about the anchoring of inflation expectations this morning in Frankfurt, as he talks up the ECB’s intention to purchase ABS. No doubt this is part of the reason EUR/GBP has dropped as I write this blog. It’s worth noting that this EUR/GBP move is consistent with my view that the pound sterling should outperform the euro as the bearish trend re-asserts itself.
On the data front there isn’t much to look forward to today. Perhaps Canadian inflation data can help us build up a picture of where global inflation is going to, and we get some fiscal numbers from the UK later on this morning. All in all, nothing too dramatic. We did see stable inflation data out of the US yesterday, with core numbers if anything slightly stronger (this was expected). This looks like a week that will end positively in terms of risk appetite. It’s just possible that the inception of ABS purchases in the Eurozone could provide the push to get the dollar rally going again… if only because it provides an incentive for players to start selling euros again. We’ll know more later on today. But it certainly makes EUR/JPY look bearish in the short term..