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Trader thoughts - the long and short of it

Financial markets began 2018 expecting that a broadening global recovery will boost overall inflation and push major central banks to follow the Fed’s hawkish lead.

Source: Bloomberg

Japanese CPI drop may highlight prospects for BOJ stimulus expansion: Speculation even extended to the perennially dovish Bank of Japan, with investors seemingly entertaining the possibility of a near-term exit from its expansive stimulus scheme. As it happens, Governor Haruhiko Kuroda may be forced to push in the opposite direction. Japan has not managed to bypass a global rise in lending rates engineered by the Fed’s tightening efforts. Close to 80 percent of worldwide monetary transactions are settled in US dollars, so when the FOMC raises the cost of borrowing the benchmark currency, it bids up the price of credit at large. The spread between 10- and 2-year Japanese government bond yields reflects as much, widening as the 2019 rate hike path implied in Fed Funds futures steepens. That counters BOJ efforts to bring inflation up to the target 2 percent and might force officials take an even more accommodative posture. CPI data due today is expected to show on-year price growth slowed to 0.7 percent last month, the weakest in five months.

Wall Street spinning tires as Europe charged higher: Once again, the US benchmark indices could not catch the enthusiasm infecting European markets. Where the German DAX charged through 13,100 and the UK’s FTSE 100 posted a record high close on the back of an eight consecutive week rally (matching the most robust pace of gains since 1994), the major US indices were plagued with ‘spinning tops’ in the middle of recent congestion. The reference is to a technical pattern where intraday highs and lows may swing heavily through the active session, but the day ends largely where it opened. When you see such a pattern pop up at the end of a strong bullish or bearish trend, it can be signal of indecision as a turning point. When it occurs within congestion as it has for the Dow and S&P 500, it just registers as a lack of course. The economic docket was light of critical market movers this past session, but there remains plenty of thematic tension on hand between the wavering North Korea summit, unresolved Iran sanctions push and the distracting local political risks. Do not expect Friday’s calendar to re-centre the attention back on traditional – and thereby convenient – data.

ASX 200 brought lower as Westpac leads banks lower, offsetting materials rally: Australian shares traded lower Thursday as losses in the financial sector offset another push higher from materials names. The latter found support amid a broad-based correction of Tuesday’s Fed-inspired moves. Hawkish comments from incoming Vice Chair Richard Clarida sent the US Dollar higher and weighed on commodity prices by extension since most raw materials are quoted in terms of the benchmark currency on global markets. When a lull in top-tier news flow translated into a retracement and brought the greenback down from four-month highs on Wednesday, commodities recovered some lost ground. This bounce seemed to be in play after the opening bell in Sydney yesterday, but the move was overwhelmed as Westpac Banking Corp traded ex-dividend. It fell 3.7 percent, shaving over 10 points off the benchmark S&P/ASX 200 index. The absence of a strong lead from Wall Street and a lull in top tier event risk might make for quiet trade on Friday. Technical cues argue for the downside however after prices put in a bearish Engulfing candlestick pattern coupled with RSI divergence following a test of 2018 highs. A daily close below 6047.20 exposes the next layer of support at 5985.60.

Canada adds jobs, pulls in capital and addresses NAFTA; now for inflation: For fundamental heft, there were no major currencies that would compete with the Canadian Dollar this past session. Through early hour’s trade in North America, the count reported a net capital inflow of C$6.15 billion through its March international securities transactions update while the ADP published private payrolls growth of 30,200. To further bolster the encouragement from this economic data, Canadian Prime Minister Trudeau voiced confidence in the progress around NAFTA negotiations, suggesting the only real sticking point is the so-called ‘sunset clause’ being sought by the US. After these headlines, the Canadian Dollar was higher against most of its major crosses and some (like CAD/JPY) forging a favourable breakout. We will see if this run will be sustained or stunted ahead when the April CPI data is due. Improving the backdrop for trade and employment is a solid foundation, but the potential to revive BoC rate expectations is a spark that could produce a real bullish fire.

EURCHF a mix of European crisis fears and the SNB’s impotency: In the FX world, the EUR/CHF is still something of a pariah. The destructive crash in EUR/CHF instigated by the Swiss National Bank (SNB) back in January 2015 still haunts those that were active in the market at the time. However, this pair continues to offer remarkable insight on systemic themes if not outright trades themselves. Following the symbolic test and retreat from 1.2000 – which was the policy floor the SNB attempted to hold for so many years – there has been an increasing pressure to post a more meaningful correction. The Swiss bank is not at all unclear about its views on the currency being too expensive. However, they have very little recourse of exacting any meaningful pressure to devalue the franc unless the Euro is already advancing under its own power to leverage EUR/CHF. That has been a clear sticking point with the second most liquid currency broadly retreating as rate forecasts have deflated. More recently, a new threat has built on the horizon in the form of Italy’s government. As it looks more and more likely that Five Star and the League may form a government, their draft of demands for the EU which reads like a list of things the Union would never entertain threatens to set the foundation for the next Euro-area crisis.

Australian Dollar faces provocative larger patterns on AUD/USD and major crosses: The Australian dollar has been cast adrift at one of the most inconvenient times possible in technical terms. There are tangible reversal patterns that have developed in favour of the AUD over the past weeks among AUD/USD, EUR/AUD, GBP/AUD and AUD/JPY. If speculative appetite were the only consideration, it would be likely that these staging efforts would progress into meaningful reversals. However, fundamentals are where motivation arise in earnest. This past session, the April jobs figures was generally positive, but not much of a spark for the kind of enthusiasm necessary to force such a high-profile break. The same is true of the May consumer inflation expectations report – not a clear signal to the RBA to revive rate hike talk. There is little on the docket today so traders should set their expectations for seismic moves accordingly.

Commodities left rudderless amid a lull in Fed-linked speculation: Commodity prices swung between gains and losses as the absence of an obvious directional catalyst translated into directionless drift. Raw materials have been trading as a foil to Fed-driven US Dollar gains and the absence of fresh fodder feeding the narrative one way or another left them rudderless. Another quiet day on the economic calendar might make for more of the same into the weekend. Traders hungry for a catalyst may pounce on stray headline flow more readily however, making for kneejerk volatility.

Market Data:

SPI futures moved -12.7 or -0.21% to 6094.26.

AUD/USD moved -0.0005 or -0.07% to 0.7511.

On Wall Street: Dow Jones -0.22%, S&P 500 -0.09%, Nasdaq -0.21%.

In New York: BHP -0.29%, Rio -0.06%.

In Europe: Stoxx 50 0.82%, FTSE 100 0.7%, CAC 40 0.98%, DAX 30 0.91%.

Spot Gold moved 0.03% to US$1291.18 an ounce.

Brent Crude moved 0.15% to US$79.4 a barrel.

US Crude Oil moved 0.15% to US$71.6 a barrel.

Iron Ore moved 0.31% to CNY483 a tonne.

LME Aluminum moved -0.49% to US$2315.5 a tonne.

LME Copper moved 0.26% to US$6826 a tonne.

10-Year Bond Yield: US 3.11%, Germany 0.64%, Australia 2.92%.


Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX

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