Article / 22 May 2012 at 13:52 GMT

BoJ and EU summit on tap. Is the USD ready to be the top dog?

Head of FX Strategy / Saxo Bank

USDJPY rose above its first resistance levels ahead of the BoJ meeting tonight, the first sign that the consolidation may be coming to an end. The USD is also firming elsewhere – is it ready strengthen across the board again already?

The last couple of days have seen an interesting test of the relative strength among the major currencies after the risk aversion trough on Friday/Monday morning. The USD actually peaked ahead of the equity market trough by a day and the two-day bounce in the USD majors like AUDUSD, EURUSD and GBPUSD may have peaked for now after the reversals back lower today.

The focus now shifts to the recent lows in these pairs as we look for whether the market will carve out a range for a while and lose a bit of energy, or if it is ready to continue trending. My default expectation is for the latter, given the open and very pressing questions and the nature of risk averse trends – that tend to get to their destination more quickly than in pro-cyclical trends. Let’s see what the BoJ and the EU summit bring in the next 24-48 hours. (If, on the other hand, the recent highs in these USD crosses fail to hold, there is still considerable room for the USD to rattle around in consolidation without threatening the overall bullish trend.)

It’s noteworthy that Euro Zone peripheral bond spreads were sharply tighter today with no real Euro upside, which makes one wonder if the ECB is intervening (doubtful) or whether the market suspects (or fears, in the case of the peripheral bond bears) that something significant could transpire at the EU summit. Keep in mind that any softening in Germany’s stance might be greeted with open arms by risk appetite and an initial Euro rally, but this should quickly yield to Euro weakness as it will eventually mean that Europe has joined the competitive devaluation game in earnest. Stay tuned.

UK Inflation
The UK inflation data today was not particularly threatening, as inflation eased sharply from March levels, though the core still came in slightly above expectations. For perspective, however, the core is now 2.1% YoY vs. well over 3.0% this time last year and the headline has fallen to 3.1% vs the peak of above 5.0% in September 2011. As well, petrol prices began falling sharply in May, so we should expect further drops in the months to come. This is weighing on GBP via the GBPUSD cross, where the bounce petered out just ahead of 1.5850. I would expect EURGBP to find resistance as well, either here at the 0.8100 area highs from today or at least well ahead of the 0.8220 resistance provided by the old low from January.

EURGBP has put in a respectable rally off the lows after the rumors of BoE hawkishness from weeks past proved vastly exaggerated. The 0.8100 area looks like a solid one for shorts to mull re-entry, though there is technical room up to 0.8220 before the downtrend is threatened. We also have the event risk of tomorrow’s EU summit.



Looking ahead
Tomorrow is a big day with the BoJ out announcing its latest decision in . If risk remains off and bonds remain firm, any reaction to stated intents at further easing might present a selling opportunity for those looking to get short JPY crosses again The beta is likely to remain highest away from USDJPY and in crosses like GBPJPY and EURJPY and AUDJPY for the more aggressive traders out there. As for the meeting itself, it’s hard to see anything beyond tough rhetoric on the JPY at the meeting, since the bank already announced further measures at its most recent meeting. Still, it is interesting that USDJPY has taken out the first line of resistance at 79.40 and has thus softened up the USDJPY downtrend a bit, suggesting that the USD may prove stronger in the next cycle of risk off. As always, keep at least one eye on bond markets when trading JPY as weak bond markets almost always mean a weak JPY.

The EU summit gets under way in Brussels tomorrow, with Hollande now taking centre stage. His rhetoric is rather mild and diplomatic now that he is no longer on the campaign trail and it will be interesting to see how the dynamic works with Merkel, who is under so much pressure on the home front. Hollande has stated that “everything will be on the table”, meaning Euro bonds. My impression of Germany’s stance is that there will need to be far more red in the equity indices – and possibly blood in the streets figuratively or literally – before there is any chance of Merkel/Germany caving in any form on the fiscal union issue. Hollande is throwing around the “growth” word as well, as if the EU leadership simply needs to declare itself pro-growth to make growth happen and that this will be the automatic outcome of stopping the Germany-led austerity drive.

As many others have argued –austerity vs. growth is a “false choice” when the latter is merely about adding debt to the bubble. How about massive debt restructuring and radical reforms? Still not enough pain, apparently, to get real change on the agenda. One wonders what it will take…

Be careful out there as always.

Economic Data Highlights

  • Norway Q1 GDP out at +1.4% QoQ and Mainland GDP out at +1.1% QoQ vs. +0.9%/+0.9% expected, respectively
  • UK Mar. ONS House Price out at -0.4% YoY vs. +1.0% in Feb.
  • UK Apr. CPI out at +0.6% MoM and +3.0% YoY vs. +0.6%/+3.1% expected, respectively and vs. +3.5% YoY in Mar.
  • UK Apr. Core CPI out at +2.1% YoY vs. +2.0% expected and vs. +2.5% YoY in Mar.
  • UK Apr. RPI out at +0.7% MoM and +3.5% YoY vs. +0.6%/+3.4% expected, respectively and vs. +3.6% YoY in Mar.

Upcoming Economic Calendar Highlights

  • Euro Zone May Consumer Confidence (1400)
  • US May Richmond Fed Manufacturing Index (1400)
  • US Apr. Existing Home Sales (1400)
  • US Weekly API Crude Oil and Product Inventories (2030)
  • Japan Apr. Merchandise Trade Balance (2350)
  • Australia Mar. Conference Board Leading Index (0000)
  • Australia Mar. Westpac Leading Index (0030)



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