Key Events to Focus On This Week
- Mario Draghi speaks
- China’s Consumer Price Index (CPI)
- China’s imports and exports
- Federal Open Market Committee (FOMC) Minutes
- Australia’s labor data
- Bank of Japan (BoJ) meeting
Key Events Last Week
- U.S. Institute for Supply Management (ISM) climbed to 50.9 from the previous 49
- Reserve Bank of Australia (RBA) kept interest rate at 2.75% unchanged, with similar dovish tone as usual
- Australia’s retail sales increased 0.1%, from the earlier 0.1% contraction
- U.S. Automatic Data Processing (ADP) climbed by 188k payrolls
- European Central Bank (ECB) and Bank of England (BoE) appeared extremely dovish, talking down Euro and GBP, despite no monetary policies changed.
- U.S. Non-Farm Payroll (NFP) increased 195k, topping medium forecasts at 165k, while unemployment rate stayed at 7.6% unchanged.
U.S. labor market unexpectedly expands close to 200k mark
U.S. payrolls unexpectedly jumped by 195,000 jobs in June, while the unemployment rate still stayed at 7.6%. The Dollar rally and Treasuries slump clearly tell us that the “Tapering momentum” model can’t be better for the current Dollar pricing, instead of “risk on, risk off” which is DOES NOT MAKE SENSE any more in the near term.Source: Bloomberg Click the image to enlarge
As expected, the Greenback strengthened against the rest of its peers significantly, especially currencies driven lower by “mouths,” such as the Euro, Cable and Aussie. You may argue that the Federal Reserve (Fed) doesn’t communicate with the market effectively because it doesn’t prefer a high long-term interest rate, but the market certainly intends to. One intention is clear: the Fed will be willing to “liberate” the Quantitative Easing (QE) purchase duration instead of holding the “infinite.” This means indirectly excising the stress test to dig out truth from the U.S. macro and banking sectors. I believe there is more than an 80% chance that the central bank’s intention is setting up cushion before the actual tapering comes. Meanwhile, it gives banks ample time, though it could take longer to shift their models into a “high interest rate” environment.
Duration short remains the main strategy after payroll data last Friday. iShares 0-5 years TIPS showed a modest rebound in the last NY session last week, while the entire TIPS ETF sold off. This strategy has yet to be outright, once it is, the Greenback may start its ‘full speed” rally.Source: Bloomberg Click the image to enlarge
U.S. Equities could be the second best market to benchmark the tapering reality after the fixed-income market. The equities slump after the latest Federal Open Market Committee (FOMC) meeting reflected worries on a “higher discount rate” to lower total valuations. But it only served as a “knee jerk” reaction when the SPX started rebounding on 24 June. Can we say analysts are not ready to adjust discount factors so far? Having said that, have fun!
Euro and Cable sell off on speeches from German and Canadian officials
Last week, when German and Canadian officials adopted the same strategies in the European Central Bank (ECB) press conference and Bank of England (BoE) meeting, in order to protect the U.S.-lead bond market, they had to be dovish although recent data in Europe pointed upward. They might smell the “195k” after the Automatic Data Processing (ADP) payroll data.
The ECB gave clues that the interest rate and deposit rate could stay low or at its current level for a “prolonged period,” despite no guidance from Mario Draghi on details of the prolonged period. Technically speaking, Draghi FOULED again, not the Canadian. A few months ago, he used the “data pledge” as the benchmark of policy guidance. If so, he should be slightly “hawkish” or no longer “further dovish.” Despite Mark Carney and Glenn Stevens taking advantage of the Fed’s policy, they do have their difficulties since the R-word is on the table now. However, it’s a hidden foul as referees could buy the story as the yield of Portugal debts surged last week. So, what a genius foul!
On the BoE side, Carney signaled that the bank would keep rates low longer than earlier consensus, by using the first meeting to establish his upcoming monetary policies, such as Bank of Japan’s (BoJ) Haruhiko Kuroda. The implied rise in the expected future path of the bank rate was not warranted by recent developments in the UK economy, despite leaving the rate and amount of bond purchasing unchanged. Moving forward, the BoE could observe bond yields and volatiles closely to adjust its monetary policy, given recent increasing borrowing costs and volatilities dampening the economy. Compared to the BoJ, BoE’s task could be much easier to handle the bond market since they have not set an inflation target yet, which means less confusion for the central bank to conduct open market operations (OMO).
However, like the ECB, the BoE did intend to defend its bond market since the U.S. Quantitative Easing (QE) tapering seems to look more real recently.Source: Bloomberg Click the image to enlarge
Do we still trust in USDJPY?
There is nothing much the BoJ can do in upcoming months, besides that we may continue seeing economic data improvement. The risk factor will be mainly from the U.S. Macro condition.
It might be still early for the Fed to start showing attitude of walking out of the zero interest-rate policy (ZIRP) environment after the two upcoming Non-Farm Payrolls (NFP). However, they do stand a chance to tweak something at the end of the year.
Meanwhile, Abe Kuroda takes a free ride. Given the higher possibility for Kuroda to add “put” features on the USDJPY, despite no official statement saying so, the force of selling off may decelerate even if the U.S. economy goes opposite of momentum now.
Having said that, I remain with a patient view in the USDJPY trade, as the Fed might not be as optimistic as the street, once economic data fades and risk premia comes.
What do you think? Take my poll:
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