Posted on: 22 March 2016, by: Pepperstone Support, category: Market Review
Poor liquidity and low volumes characterize the start of this holiday-shortened week.
The drop in market activity was said to be broad based across G10 and LM with JPY and MXN particularly quiet (-65% below normal). Themes have been very mixed with light GBP, AUD and USDCAD selling.
This seems to be a continuation of the USD repricing post last week’s dovish FOMC.
USDJPY rallied towards 112 as NY walked in. There was no obvious driver for the uptick except UST had sold off a bit (10y yields 5bps to 1.92%). Spot has fallen back to 111.60s as yields come off.
GBPUSD has been grinding lower after weekend news suggesting further rifts within Cameron’s party. The latest EU referendum poll by Opinium shows the Leave camp has a one percentage point lead over the Remain camp (41% versus 40%).
The oil rally seems to be running slightly out of momentum. WTI Crude has turned lower just shy of the double bottom target (closer to the November 24 high at USD43.46). When looking at the slow stochastics, there is currently triple momentum divergence here (bearish) that would suggest we could see a near-term pullback. Support comes in at the USD35.96-USD36.09 area. If price were to close below there, support also comes in at the double bottom neck-line at USD34.82.
Reports of potential ‘stealth’ supply out of US shale producers are also gathering attention.
With a light macro calendar, the market will likely focus more on the flurry of central bank speakers.
We’ve heard from three Fed speakers today and all seem to lean on the hawkish side:
Richmond Fed’s Lacker, who is a known hawk and not voting this year, remains "reasonably confident that, barring subsequent shocks, inflation will move back to the FOMC's 2% objective over the medium term." Lacker adds while the recent declines in breakeven inflation does give him some pause, he thinks evidence indicates inflation expectations remain well anchored and reiterates the Fed must not be caught ‘behind the curve’ when the economy recovers.
San Francisco Fed’s Bullard (voter, leaning hawkish) says April or June FOMC has the potential for a hike. Williams also advocates caution in market based measures of inflation expectations such as TIPS/UST breakeven rate, noting these are “extraordinarily sensitive to energy prices" and other factors.
Atlanta Fed’s Lockhart, perceived to the Fed’s bellwether albeit not voting this year, says he sees “sufficient momentum evidenced by the economic data to justify a further step at one of the coming meetings," he said, "possibly as early as the meeting scheduled for end of April.”
We have Evans (voter) and Harker on Tuesday, and Bullard (voter) on Tuesday.
ECB speakers have defended the central bank’s monetary policy during the London morning:
ECB Executive Board member Coeure says ECB monetary policy have “supported demand for goods and services in the euro area”, “improved financing conditions and remedied financial fragmentation” and “helped maintain trust in the single currency in a context of financial instability and high uncertainty”. Similar to recent speakers, Coeure says the ECB has “no shortage of tools” to its inflation target.
ECB’s Villeroy (France) warns of second-round effects of low inflation and says the Eurozone risks an unanchoring of inflation expectations. He says ECB policies have produced tangible results and are overall good for banks.
ECB’s Liikanen (Finland) affirms the ECB expects policy rates “to remain at present or lower levels for an extended period of time, and well past the horizon of the asset purchases.” He states the ECB still has capacity to boost inflation and growth if the outlook or financing conditions deteriorate.
ECB Vice President Constancio speaks on Capital Markets Union and the European monetary and financial framework. He notes “financial integration and capital markets’ development can facilitate the transmission of monetary policy in the euro area” but doesn’t comment on specific policies.
BoE Forbes discussed UK’s current account vulnerability under domestic and global shocks. Bottom line, the UK current account deficit is both ‘risky’ and ‘risk-sharing’, and there is ‘not much’ implication for her vote at the MPC this month.
In Ceemea, we have the central bank decisions from Hungary on Tuesday and Turkey on Thursday. Latam has also traded on the quite side with a good part of market players out for the Holy Week.
Bloomberg reports the IMF calls on PBoC to release more data on its derivatives holdings. Derivatives here mean FX forwards, since big local banks have been very active since August in USDCNH both spot and forward.
Brazil’s Lula was reported (by a local newspaper) to be considering giving up his cabinet post