A boring week last week as EUR ground lower and USD/JPY slid back to 94 as the Yen was bought of safe haven demand. Sterling also managed to get above the 1.52 level against the US dollar, closing at 1.5204 Friday afternoon. Soft US data earlier in the week was counterbalanced somewhat by firmer numbers on Friday. Initial unemployment claims came in a bit high at 357K, versus the 335K median analyst estimate. Chicago PMI was also a bit soft, registering 52.1, nearly for points lower than the figure expected by analysts. Quarter one GDP was also a bit light, with the US economy growing at a 0.4 percent clip in Q1 on an annualized basis. This disappointed markets which were expecting a 0.8 rise in output for the first three months of 2013. On the bright side however, personal spending was up, coming in at 0.7 percent, beating analyst expectations by 0.1. Finally the University of Michigan poll of consumer sentiment also can in slightly higher than expected, 78.4 versus 74 estimated.
The week therefore was mixed bag with in terms of data with a slight to moderate bias to the downside. Certainly, hard numbers like GDP ought to trump intangibles like sentiment, and movement by the markets reflected that. Crucially, the week PMI and GDP numbers was supportive of EUR/USD, further evidence that USD is no longer a safe haven asset.
In the coming weeks, all eyes will be on central banks. The
Fed will almost certainly continue its current 85 billion in asset
purchases for 2013. But actual tightening of policy will not occur
until as late as 2018. For reason discussed earlier on this blog, and
as later elaborated on by Chairman Bernanke himself, the Fed will most
likely tighten policy by allowing its portfolio to run off and raise
interest paid on excess reserves.
The BoJ's new team took office this week, and the markets are waiting for specifics on how Governor Kuroda will achieve the new two percent inflation target. The contours are known. The BoJ will print money to finance asset purchases, nonetheless, a word of caution must be given to the Yen bears. If fiscal and monetary stimulus actually manage to get Japanese growth going again, the Yen could very well rally significantly against other majors. Since the market already expects the BoJ to expand its balance sheet, further money creation by the central may well be already priced in. However, any potential economic gains are not. This scenario would see capital inflows to Japan, as local investors shift bias back to domestic investments and European oand US funds try to cash in on a BoJ fueled Nikkei rally. I'm still short JPY, but I have cut my position substantially, due to this specific concern. Its possible that USD/JPY goes back to being a buy on dips, but it will be of paramount importance to watch the market's reaction to both the BoJ and national government's policy initiatives. Specifically, any rallies in Japanese equities which coincide with Yen gains will put a serious question to the short JPY trade.
In Europe, both the ECB and the Bank of England will be in the spotlight. The ECB continues to face challenges as a key player in the resolution of the European sovereign debt crisis. On the easing front to stimulate a sagging European economy, the ECB run out of ammunition. Interest rates are rapidly approach their zero bound. One day libor for EUR is already at a paltry 0.3 percent. On the other hand, the ECB's commitment to continue to purchase bonds of countries which enact fiscal reforms, and the ability of the European Council and the IMF to enforce these reforms, will set the tone for EUR going forward. In Britain, focus is on the incoming BoE Governor Mark Carney, and any expansion of the current QE program in an attempt to jump start a British economy in deep recession. Sterling has weakened substantially, and has decoupled from EUR to some extent. Shorterm, movements will be driven by British economic data and the BoE. Longterm, the picture is very uncertain. Sterling is almost certain to become irrelevant as a reserve asset, however a recovery in Britain should help GBP. Finally, the SNB remains steadfast in its defense of its 1.20 floor for EUR/CHF. The rapid appreciation in the Franc has wreaked havoc in both the Swiss real economy and its financial sector. Therefore, it remains highly unlikely that the SNB would allow franc appreciation.
In sum, Europe and Japan remain the big players on the central bank front as their respective economies recovery. Crosses like EUR/JPY is therefore the one to watch.
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