Central Bank Week. We are Withdrawing from our long AUDJPY taken 75.00-78.00
We have an interesting week ahead with four central banks rate announcements. It is important that traders become familiar with the characteristics, the positioning and the patterns of the central bank statements, as this can guide your trading decisions around these key events. The RBA, for example, are typically more direct in their policy intentions, so this often lends some support to a view on a trend we may trade.
The FOMC's Lockhart and Evans but the market had little reaction to their statements. There is clearly keen debate within the Fed on potential normalization of policy and markets have been reactive to recent comments from other members. In order to see fundamental dollar support going forward we look to changes in tone from some of the less hawkish members including Bernanke (who will speak later today, although the subject is not monetary policy). Tomorrow, we have the FOMC minutes from the previous months meeting which should provide colour on the FOMC's general stance. As we discuss in almost every Pro Traders Club session, the FX market is currently driven by interest rate seeking flows. You can learn all about this in the course titled, "Inside the Banks."
Our Pro Traders Club chat room is getting busy. I make it in there, when i have time, and last week we did some good trading together.
The G7's coordinated intervention last month appears to have succeeded in re-aligning the FX market, and a near-term USDJPY move to 85 now looks reasonable. From a seasonality perspective, April has been the yen's worst month over the last 20 years. Yet while the carry trade has clearly turned a corner, investors should not lose sight of the shift in fundamental dynamics - generous central bank infusions of liquidity, intervention and depressed volatility - governing its success.
A German newspaper claimed senior IMF officials are now privately recommending to European governments that Greek debt should be restructured. An IMF spokesperson denied the reports, and instead restated the IMF's support for the Greek government's "determination to fully service its debt obligations". Greek Finance Minister Papaconstantinou said there is "absolutely no chance" that Greek debt will be restructured, pointing out that "the costs could much outweigh the benefits".
With investors fixated on the upcoming ECB policy meeting, the euro was largely indifferent to Friday's batch of sovereign rating actions. Fitch downgraded Portugal by three notches to BBB-, and kept the country on watch negative. This brings Fitch into line with S&P after the latter downgraded Portugal by a total of five notches in the past 2 weeks. Moody's continues to rate the sovereign at A3. Elsewhere, S&P cut Ireland's rating by a single notch to BBB+, outlook stable, while Fitch put Ireland's rating on watch negative.
Portugal sold €1.645 bn worth of June 2012 bonds. Although this was more than the €1.5 bn indicative offer, average yields were much higher than those seen previously, and the bid-to-cover ratio dropped sharply to 1.4 (prev. 2.3). The auction should help ease any lingering market concern over a €4.3 bn bond, which matures on April 15.
The desire to prevent further CHF strength continues to influence monetary policy at the SNB. Governing Board member Danthine conceded that although rates are "clearly too low" for the real-estate sector, the strong CHF justifies a continuation of a very cautious policy setting. He added that whether the SNB will hike depends on the actions of other central banks, clearly implying that the SNB is very unlikely to tighten unless the ECB leads the way.
We are sitting on long positions in USDCHF and EURCHF, although upside potential for the latter will be limited. We expect the cross to push even higher on the back of solid risk appetite, rising ECB tightening expectations, and a dovish SNB. The market is now thinking ECB could tighten as much as 75bps, approx 25bps per quarter.
The question of how Japan will fund the post-earthquake reconstruction effort remains unresolved. Local press previously suggested the BoJ could be asked to underwrite any additional bond issuance. Were this to happen, we would see it as highly yen-negative. Newspapers have since backed away from such claims, after government officials such as Finance Minister Noda and Economy Minister Yosano both denied there are any plans to go down that road. UBS JGB strategist also sees such a move as highly unlikely. On Friday, BoJ Board member Shirai warned of the dangers of using the BoJ to underwrite JGB issuance, predicting it would damage confidence in the yen, and would ultimately raise government borrowing costs.
Our short JPY's discussed a couple months ago, are doing well. We anticipate short JPY to be one of best directions to trade into year end.
As for long USD, it is not looking good for USD, at the moment and we will have to be patient. Quite simply, the yield story has overrun the currency and we will have to wait on hints from the FED. Perhaps when ECB language neutralizes and the FED begins to confirm a move out of QE.
The RBA is expected to pause for another month, leaving the cash rate unchanged at 4.75% for a 4th meeting. The market has currently priced in +15 bps hikes in the next 12 months, so rate spreads will begin to tighten against AUD. While domestic growth momentum in the near-term 1Q11 will be affected by the floods in Queensland, the earthquake and tsunami in Japan has raised the uncertainty in economic outlook. While the natural disaster in Japan may weaken Australia's growth in the near-term, it will boost the economy in the longer-term as demand for commodities will increase for reconstruction needs. Note that Japan accounts for about 19% of Australia's exports. We have withdrawn from most of our AUDJPY positions and are waiting to rebuild the positions, as noted in Pro Traders Club, which also showed the live trading I did when taking positions on the spike down on AUDJPY, called in the live PTC earlier the same day.
This is the point where Maria, who has now emerged from our program as a full time trader and current PTC member, is to ask me about the GBP. I'll cover those details in Pro Traders Club :)