Japan surges while FX moves remain subdued

Asian markets are enjoying some mild gains after the ECB discussed some of the easing options it is currently considering.

Reduced risk of heightening Ukraine/Russia tension also played a role in the positive risk momentum. Once again Japan has been at the forefront of today’s gains despite limited moves in USD/JPY. The pair just remains capped by the 102 level and I doubt we’ll see any big moves until the US returns to trade later today. Perhaps the strength in Japanese equities is more a factor of positioning ahead of some key events for Japan heading into the back end of the week.

Tomorrow we have BoJ Governor Haruhiko Kuroda speaking while Thursday brings retail sales numbers and Friday inflation data. All these events will be key given it’s the first month post the implementation of the consumption tax hike. Comments by BoJ Deputy Governor Kikuo Iwata suggesting the stimulus may be withdrawn if the economy overheats and exceeds the 2% inflation target could cap yen weakness in the near term. This puts even more emphasis on Japan’s economic strategy which is to be announced by Prime Minister Abe in June.

China easing to help sentiment

Markets in China are relatively flat as investors continue to mull over the scale of easing we might expect to see from China. The general consensus is we shouldn’t expect any aggressive easing measures from China. With Premier Li having finally acknowledged that the economy faces downside risks which require action, analysts have been looking at various scenarios which could be actioned.

Already the government has taken measures to relax funding conditions for developers and mortgage loans along with easing conditions for local government lending. Some analysts feel renovating shantytowns in China is a form of new investment and will help underpin growth in coming months.

FTSE to return to trade

Looking ahead to European trade, the major bourses are mostly pointing lower, with the exception of the FTSE which was closed yesterday and as a result missed out on the big gains across the region. The MIB rallied quite significantly led by the banks and it is likely to be the weakest performer at the open as it gives back some of these gains. While Italy benefited from PM Renzi’s Democratic Party victory, yields also cooled in response to Draghi’s comments.

The ECB said it will have to act to counter the possibility of lower inflation and weak lending risks. Draghi discussed the possibility of negative deposit rates, further LTROs and a broad-based asset purchase programme. He also made it clear that they were concerned about an undesirable tightening of monetary conditions due to a firmer exchange rate. This was yet another sign that the single currency could be a short trade over coming weeks.

Data is limited out of Europe later today but no doubt there will continue to be emphasis on the ECB policy forum where Mario Draghi speaks yet again. The US looks like it will return to trade on a positive note with futures currently pointing mildly higher. There will be quite a bit of data to look out for including durable goods orders, consumer confidence and the Case-Shiller index.

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