Japan leads Asia whilst China lags

Asian markets have been mixed as China continues to struggle while Japan has managed to gain some ground on the back of renewed yen weakness.

USD/JPY has pushed through overnight highs and now seems to be gearing up for a move back to 103. With the safe-haven play swiftly unwinding, yen weakness is back in play.

There were a couple of interesting releases out of Japan today, particularly the Tokyo February office vacancies which dropped to 7.01%. This is a significant drop in vacancies from June last year when the rate was at around 9.5% and is also the lowest level since May 2009. This reading is - to an extent - a good forward indicator of sentiment on the business side.

Weekly funds flow data also showed a significant drop in foreigners buying Japanese bonds which is negative for the yen and positive for equities.

Non-farm payrolls will be key

As we head into a crucial couple of days of US economic data, this pair will be the one to watch.

Later today in the US we have unemployment claims, non-farm productivity, revised unit labour costs and Fed members Plosser, Dudley and Williams speaking. Richard Fisher was on the wires earlier voicing some concerns about a bubble in equities.

A round of good data could push USD/JPY higher heading into tomorrow’s non-farm payrolls. Expectations for Friday’s reading are quite high; with the market expecting a jump from 113,000 to 151,000. A concern is that many analysts have started downgrading their expectations for Friday’s reading after the sharp decline in the employment component of the non-manufacturing ISM.

AUD/USD back above 0.90

Data releases have been limited today but there is a bit of activity in Australia where investors reacted to trade balance and retails sales numbers.

AUD/USD was knocking on 0.90 after having come within touching distance of that level in yesterday’s Asian trade.

With retail sales and trade balance numbers due out today, expectations were riding relatively high after a string of better-than-expected local releases this week. Gains in the AUD accelerated upon the release of the data after a much-better-than-expected $1.43 billion surplus (versus $0.1 expected) while retail sales for February surged 1.2%. These stellar numbers saw AUD/USD rally to a high of 0.9033 and finally push through the 0.90 mark.

It is a tough play for the AUD at the moment. We are currently having some good numbers, while the RBA looks like it is starting to jawbone the local currency lower again. Glenn Stevens parliamentary testimony tomorrow now holds the key to how the AUD will finish off the week. More likely than not he will be looking to talk it down further given its historically high trading level. A scenario that could play out is AUD/USD could rally to test recent highs in the 0.908 region then begin to decline once again. This could then result in a retest of the 0.90 level.

ECB in focus today

Looking ahead to European trade, we are calling the major bourses firmer.

Two central banks will be in focus today, with the BoE and ECB rate decisions due out. The latter of the two is likely to draw more attention given recent talk of another rate cut. The meeting itself is at 23:45 AEDT followed by Mario Draghi’s press conference at 0:30 AEDT.

EUR/USD has remained steady in Asia, fairly sidelined at around 1.372. The fact that it didn’t rally in-line with risk overnight despite poor US data suggests the market is positioning for dovish action.

Perhaps the main issues to look for would be a cut to the refinancing rate from 25 basis points to say 10 basis points. The idea here is to limit the upside in EONIA (interbank lending rates) rates. There is also a lot of talk about not sterilising the bonds it purchased through its Securities Market Program (SMP) during 2012. This would cap gains in the EUR as it could see its balance sheet expand by around 6%.

There will also be focus on revisions to its economic projections and any material downgrade to its inflation forecasts could be bearish. The risk/reward trade is certainly to be long as price action overnight would suggest traders have prepared themselves for a bearish set-up.

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