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Asia has largely had a day to forget, and to say traders have been largely sidelined is an understatement.
Whether this is just because of today’s US payrolls is debateable, as I get the sense that this is a market that is really keen to see a genuine improvement in US data again and look to regain the momentum the economy was building prior to polar vortex. Traders are now seeing fragmentations in the stance among G10 currency central banks again and are trying to differentiate those who are thinking about rate hikes and those who could become more loose.
The Federal Reserve fits into the future tightening camp, along with the BoE and RBNZ, with a number of Fed members giving explicit timeframes for when they see a rise in funds rate. A solid payrolls print will do wonders for market confidence that the US is back on track and while there are cries for ‘buy the rumour, sell the fact’, I would question why anyone would sell USDs, equities or commodities on a good print, regardless whether a number above 200,000 is priced in. My gut suggests it would be more ‘buy the rumour, do nothing after the fact’, however I do think it will set the platform for something much more substantial for the USD.
EUR/USD is a firm sell-on-rallies candidate and I would be using rallies back to 1.3750 - 1.3800 as a level to accumulate short positions for a longer-term move to 1.3000 this year. The ECB has thrown in the threat of QE, however this is probably some months off (if at all) and their base case still remains that inflation is still likely to gravitate higher. This puts the April 16 EU CPI print firmly in play, and another month with inflation at or very close to 50 basis points (or 0.5%) should get the market fairly excited that unsterilsed asset purchases are coming.
The issue for traders then is what assets do the ECB buy? Clearly they are not going to buy government bonds, and any assets will probably be confined to private assets, or as Mario Draghi called it; ‘private QE’. So traders will be keen to try and work out what assets they may buy and position themselves in stocks and other assets which may benefit.
EUR/USD ripe for a longer-term downtrend?
Even if we do see a slight recover in inflation and the ECB doesn’t end up going down the route of unconventional measures; EUR/USD is still a sell. The three key factors which are supporting the EUR have been ECB balance sheet contraction (while the Fed’s expands) and inflows into peripheral bonds and equities, and these variables can’t hold up forever. Greek yields are now at 6%, the Portuguese 10-year is below 4%, while Spain and Italy are at the lowest levels in years. There has to be a point when money managers say valuations on bonds and equities are just not attractive.
We also know that the Fed’s balance sheet expansion will come to end (if data holds up) in Q4, while there is a possibility the ECB looks to stop sterilising the bonds it purchased through its Securities Markets Program (SMP) and this would see its own balance sheet expand 7% or so.
With these arguments potentially dissipating and the market moving back to looking at growth and central bank divergence, EUR/USD should fall fairly hard. A solid payrolls report could send the USD on its merry way.
USD/JPY could be a good buy
USD/JPY has struggled to catch a bid today, although this pair looks delicately poised to make an assault at the January 2 high of 105.44. Technically and fundamentally this pair is a buy in my opinion, and clearly a break higher in US yields would assist here. The close above the March 7 high seems significant, although there is a fair bit of supply coming into the pair at the 104.00 level. The Nikkei has put on 0.1%, but will gap higher if the US payrolls come out stronger.
In the commodity space look for gold to test the former downtrend drawn from the October 2012 high at $1266 if we get good payrolls, and given the strong negative correlation the commodity has with USD/JPY, if USD/JPY rallies then gold will struggle. Brent Crude is testing, but respecting, the 2012 uptrend on the weekly chart and needs to close above 105.76 or we could see a deeper correction.
European markets look set to open on the front foot, despite flat trade for the ASX 200, Nikkei and CSI 300. German February factory orders should be a sideshow to the US payrolls, while Canadian employment is also expected to show solid improvement as well (although this is prone to massive beats/misses). As always there more to look out for in the US payrolls than just the headline print. The unemployment rate is expected to fall 10 basis points, although this gets less significance now the Fed have removed its forward guidance. The average earnings could be a bigger USD positive, given last month’s big 0.4% gain and the impact this has on inflation.