The run higher in risk appetite finally eased yesterday, likewise ending the JPY’s run to the downside. Next week looks pivotal for the USD and the EUR on central bank meetings as the Fed and the European Central Bank are likely set to shift guidance. The euro is weaker on fresh highs for the week in Italy’s bond yields.
Japan saw its Q1 nominal GDP revised lower to -0.4% from the prior -0.3% estimate, a rather sorry performance given the Bank of Japan’s ongoing attempt to generate inflation. The trade-weighted JPY was up a few percent in Q1 from the prior quarter and likely contributed to the weak performance. But a number like that reinforces the idea that the BoJ is in no hurry to tighten policy and that the main upside path for the yen is via a drop in yields elsewhere, which makes the moribund low rates in Japan look less unattractive. The JPY managed a bounce after spiking all the way to 110.00+ in USDJPY and the even more impressive recovery in EURJPY as high as 130.00.
The euro was finally held back after its attempt to put on a show of support as the fresh widening in Italian yield spreads has become too loud to ignore. The 2-year Italian benchmark yield pulled all the way to 165 basis points yesterday. The idea has emerged after recent official and unofficial noise from ECB president Mario Draghi and company that they are happy to keep both eyes on hopes that inflation expectations in winding down policy later this year and ignore Italy’s woes, perhaps hoping that the pressure from rising bond yields will provide its own discipline. Even if the ECB plays tough and spells out a schedule for winding down quantitative easing later this year, it is hard to see the euro sustaining any rally as long as Italian yield spreads are this elevated.
EM currencies are weak in broad terms, led by a struggling Brazilian real which notched new local lows yesterday and is near the 4.00 level versus the US dollar again for the first time since the early 2016 lows in EM’s fortunes. The Brazilian central bank head said yesterday that no emergency meeting will be held and that it will continue to offer currency swaps and may provide liquidity from reserves. This didn’t seem to reassure the market, which perhaps wants an emergency hike akin to the recent Central Bank of Turkey move in late May. That move and yesterday’s 125 basis point rate hike from the CBT have stabilised TRY despite EM wobbles elsewhere. India’s central bank also surprised with a 25-basis point hike this week, its first hike since 2014. In Argentina, the IMF has signed off on a massive three-year $50 billion bailout deal, which the FT says fund chief Christine Lagarde has sized to bolster confidence
Today’s economic calendar is a rather light one, with Canada’s jobs the most interesting data point of note as USDCAD plays cat and mouse with the 1.3000 level. The great David Rosenberg is rather bearish on the loonie as outlined in a recent op-ed in the Financial Post , and he points to political parallels with the early 1990’s when CAD was struggling mightily. Canadian rate spreads versus the US argue for an upside break, but let’s see.
Chart: USDCAD - weekly
USDCAD has consistently run into resistance around the 1.3000 level, but sell-offs have been shallow and lacked conviction, so patient bulls can still look for a solid close above 1.3000 for the week to point to further gains, even if the range highs are somewhat higher into 1.3100+. Note the descending trend-line from all the way back to early 2016 also in play here.