JPY crosses in focus after bond rally as EURUSD watches IFO
• Markets unable to establish direction
• JPY crosses most likely source of volatility
• EURUSD to take possible cue from IFO data
By John J Hardy
It has been a fool’s errand lately to build expectations for a directional move in this market environment. In EURUSD, we had a run on short-term shorts yesterday as we’ve yet to see any follow through lower after last week’s Federal Open Market Committee meeting. USDJPY has been effectively rangebound for almost two full months between 100.75 and 103.00. AUDUSD is in a similar indecisive state — pushing higher time and again, but with no real ability to follow through.
Options volatility is dropping like a stone with Deutsche Bank’s 1-month measure of implied volatility falling all the way to 6.68 percent level yesterday, the lowest level since a dip to below 6.50 percent briefly in December of 2012 as the enormous JPY cross rally was getting under way. The lowest weekly close since mid-2007, by the way, was 6.85 percent for this index, so if we don’t pick up directional interest by the end of the week, we’re talking about fresh 6.5-year lows in anticipated volatility.
With such divergent expectations for future monetary policy trajectories, this lack of directional interest is a bit confounding, but let’s remain patient and see what materialises in the days ahead. The sell-off in asset markets yesterday and big-bond rally suggest that JPY crosses should be the focus of the most volatility in the days ahead. As well, we’re in the last days of the Japanese financial year heading into next Monday.
Today, watch the German IFO survey, particularly the expectations component, which tends to lead the overall index and turned down in February even while the overall survey managed a higher print. Looking at the March German data and asset market moves, I’m looking for a disappointing reading. The expectations portion of the ZEW survey has also turned down in recent months and tends to lead the IFO more often than not.
Grilled Bratwurst is on offer at a meat stand at a Berlin fair, but will today's IFO demonstrate a lack of confidence among business? Photo: Sean Gallup \ Thinkstock
Chart: Germany ZEW expectations vs. IFO Expectations
Note that the ZEW expectations (white line) has turned decisively lower in recent months while the IFO expectation only turned south in February. Looking at the past history, it is more often the ZEW that leads the IFO, and a disappointing reading in the latter could pressure the euro today after we bounced once again at the key support areas in EURUSD yesterday. Either way, the EURUSD needs to make a near-term directional commitment soon. (Chart source: Bloomberg)
The strain from Ukraine
Also keep an eye on Ukraine, where the rhetoric remains very dangerous and the general escalation continues. The US and its allies have now booted Russia from the G8, Ukraine seems to be toying with electricity supplies to Crimea, and embarrassing telephone conversations of Ukraine’s former leader talking about wiping out ethnic Russians with nuclear weapons aren’t the stuff of détente. Russia has also raised the price of gas to Ukraine to higher than it charges for other destinations. Germany's Der Spiegel penned an article yesterday suggesting that Merkel would like to take a hard line on Russia.
Other event risks today include UK February Inflation data, US Mar. Consumer Confidence and February New Home Sales data. The ECB’s Mario Draghi is also speaking at 1600 GMT. The ECB/Bundesbank’s Weidmann will speak with non-German press in Berlin today at 1630 GMT.
Economic data highlights
- Japan Mar. Small Business Confidence out at 53.5 vs. 50.6 in Feb.
Upcoming economic calendar highlights (all times GMT)
- Germany Mar. IFO Business Climate (0900)
- UK Feb. CPI/RPI/PPI (0930)
- UK Mar. CBI Reported Sales (1100)
- US Jan. S&P/CaseShiler Home Price Index (1300)
- Hungary Central Bank Decision (1300)
- US Mar. Consumer Confidence Index (1400)
- US Feb. New Home Sales (1400)
- US Mar. Richmond Fed Manufacturing Index (1400)
- Eurozone ECB's Draghi to Speak (1600)
- Eurozone ECB's Weidmann to Speak (1630)
- US Fed's Lockhart to Speak (2000)
- Australia RBA's Lowe to Speak (2230)
- US Fed's Plosser to Speak (2300)
John J Hardy is Head of FX Strategy for Saxo Bank. More of John's commentary can be found on our online social trading site.