After tensions eased in Ukraine and China in the beginning of the week, risk appetite was back with AUDJPY up 4% since its low reached on Monday at 90.00. It helped the stock market recovered, with S&P500 and Eurostoxx 50 up by 2.5% and 3%.
Australian fundamentals also surprised traders: Q4 2013 GDP printed above consensus at 0.8% QoQ (vs 0.7% expected), January Trade Balance came in at 1.43bn AUD smashing expectations of 270mio AUD (exports went up 3.7% while imports rose 0.82%) and retail sales surged to 1.2% MoM in January (vs. 0.5% estimates) from a revised 0.7%. The pair broke its 100-day MA at 0.9080 to trade at 0.9112 in the late afternoon before coming back below the 0.9100 level. On the Asian side, the Yen dropped to a five-week low against the greenback (up 1.8% to reach a high of 103.16) after GPIF (world’s largest holder of JGBs) advisory panel announced that the fund ‘doesn’t need a domestic bond focus’ given quickening inflation.
As expected, the Bank of England kept its Official Bank rate steady at its record low of 0.5% (five years now) in order to help the UK economy on to a full recovery (UK grew by 1.8% in 2013, fastest pace in 6 year). Policymakers also announced that the central will reinvest GBP 8.2bn on a bond that it bought in its QE operations that was set to mature on March 14. As you can see it on the chart below (30-min period), Cable eased after the announcement until it found support at around 1.6685, then the pair surged for the rest of the (London) trading session. The gains were capped slightly above its ST resistance at 1.6760 and GBPUSD is now back in its 1.6660 – 1.6760 range. Poor US data tomorrow could bring the pair back above the 1.6800 level; the strong resistance on the topside stands at 1.6825 (Feb 17th high).
The big mover today was the Euro of course as Draghi ‘disappointed’ the market. He left the refi rate unchanged at 0.25% and gave a quite optimistic conference in the afternoon, which we believe pushed the single currency above the 1.3800 level against the greenback (EURUSD rose 120 pips approx. during the press conference to 1.3850). According to the ECB, the unemployment is stabilizing and the downside inflation risks ‘remain limited’. Policymakers also raised their growth forecast for the Euro area by 0.1% to 1.2% for the year 2014 and are expecting a 1.8% inflation rate in 2016 (still concerned about the inflation rate for 2014, revised lower to 1.0%).
Having said that, we are now wondering if we could see a turning point tomorrow ahead of (or straight after) the US employment data. Yesterday, ADP reported that the US private employers added ‘only’ 139K jobs in February (vs. 160K expected) with January’s print revised lower to 125K (from 175K), and we saw that non-manufacturing PMI fell to a four-year low to 51.6 (from 54.0 in January and vs 53.0 cons.) with the employment index contracting for the first time in two years (from 56.4 to 47.5). we saw this chart (below) yesterday in a research which we find interesting; it shows the employment index (in orange) from the ISM non-mfg survey overlaid with the NFP data (in purple). Some economists already revised down their estimates for tomorrow even if 150K (market’s expectations) is a disappointing figure for the US economy. A weaker-than-expected figure will definitely reverse the trend on USDJPY and could potentially impact this week’s ‘market effort’.