This week presents a host of data from Japan and China, along with monetary policy minutes from FOMC, ECB and RBA.
- Precious metals continued to shine, with Gold reaching an impressive 14% gain in February alone.
- WTI rallied to a four-day high on Friday and continued to meander around the $30, as bearish traders closed bets leading into a 3-day weekend for the US. However price action recently has been both volatile and seemingly independent to news.
- US stock indices remained supported above multi-month lows and, despite closing down for the week price action suggests an upside bounce may be on the cards. European stocks remained under pressure as fears of another financial crisis remain. Nikkei 225 created 16-month lows due to the strength of the Yen, seeing it worst performing week since the GFC.
- Japanese Yen retained its (negative yielding) safe haven status overall, but gave back gains at the latter part of the week.
- USD Index held above Thursday's, multi-month lows but near-term trend remains bearish below 97.46.
USD Futures: The long/short ratio of large specs dropped to its lowest level this year, fuelled by an increase in short exposure and reduction of longs. This is likely explained by the soft PMI data for services on 3rd Feb, which had not been included in the previous CFTC report. Also up for debate is the missed results from NFP data which only saw 153k jobs created.
EUR Futures: On the other side of the coin is Euro, which now sees speculative long/short ratio at its highest level since Oct '14, but still net short. Short exposure has been steadily declining since the December low (when Draghi failed to satisfy markets with further QE stimulus and lower rates) whilst short exposure has been reduced by over 50% in just two weeks.
JPY Futures: The Japanese Yen has continued to strengthen, despite the surprise decision by BoJ to cut interest rates to -0.1%. Investors are clearly happy to pay a premium for the safety of the Yen, which now has many wondering if/when an intervention to weaken the Yen is on the card. Long interest has edged down slightly but remains elevated compared to the prior two years trading, whilst short interest has continued to decline.
After Yellen told congress that FED are unlikely to cut rates despite the global risks, the FOMC minutes may shed light on if this view is shared among voting members or not. The FED is not yet sure how much impact recent volatility will have on US growth but appear (publicly at least) that raising in December was the right thing.
Industrial production is expected to post its first expansion in 6 months. If successful tis should help support the USD Index which is holding just above multi-month lows. However another negative print will give the bears (and ISM manufacturing followers) more ammunition for a lower Dollar. The Philly FED manufacturing is another indicator screaming trouble for the US economy which is tracking the ISM and industrial production reads quite closely, and expected to contract a further 2.9%.
Trade balance and inflation are the key data sets this week. Monday's trade balance will see if the recent strength (or slower rate of contraction) continues with their export market. Having been negative since August 2015, the rate of contraction has slowed to -1.4%. The import market is showing less strength and has been in decline since December 2014. A slower import market hurts key trading partners, particularly NZD and AUD to these are the crosses to keep an eye on among the G10 economies.
Japanese data is likely to be pushed higher in traders lists' since their negative yield rate cut on 29th Jan. Q4 GDP contracted -0.4% on a quarterly basis and -1.4% on an annualised basis, so not off to a great start. Up next we have the industrial production and tertiary industry indices, both of which have also been contracting in line with global trends. When you consider BoJ said they may look to ease further, then any weak data makes more stimulus or even intervention a more likely scenario.
On 4th Feb Mario Draghi told the markets ECB will 'not surrender' to low inflation in another 'all-it-takes' speech to suggest more stimulus in the March meeting. The trouble is however markets don't appear to be taking his words as seriously, as they sent the Euro higher yet again and resulted in closer of short and increase of long bets. Perhaps his speech this week will be taken more seriously, or the minutes will reveal a more robust plan. However at this stage sentiment remains positive on Euro and negative on European stocks and USD, which suggests a higher EURUSD is more likely.
RBA minutes and the highly debated ABS employment figures are in focus domestically. Regardless of which camp you are in regarding the reliability of employment data, it could be argued that it really only matters how the RBA interpret them. And recent comments from Glenn Stevens would suggest he is willing to give them a shot and reassess when more data is available.
BoC are expecting inflation to pick up gradually in 2016 and Friday will confirm if this is indeed the case. They also cited Q4 GDP to soften which could take the sting out of any shortfall, but overall we could find US news and oil-related stories to be more of a key drover for Canadian Dollar crosses.