3 Numbers To Watch: USDJPY, Spanish And Italian bonds
Saxo Bank | May 27, 2013 03:59AM ET
As the U.K. and U.S. run into long holiday weekends, today’s calendar is practically empty and the European session will be very quiet. There will however be some key speeches: The European Central Bank’s Jörg Asmussen will speak at 04:15 GMT and 06:30 GMT. Chinese premier Li Keqiang and German chancellor Merkel are also meeting, and I would not be surprised if we see a headline of cheap talk that Europe is important to China, and that China is ready to co-operate with Europe. This could create a short-lived pop higher in the EUR/USD and stock prices. The markets are currently driven by three major factors:
- Inaction of the European Central Bank, and uncertainty over whether the bank will initiate plans to alleviate the tight credit conditions in the Mediterranean countries.
- Uncertainty over the U.S. Federal Reserve’s asset purchasing programmes, specifically when and under what conditions the central bank would slow down its purchases.
- Japan’s ‘Abenomics’, or inflation goal and massive government bond purchases.
For today’s ‘3 numbers’ I will take a look at the 3 markets that could be affected by the above factors - the USD/JPY, Italian and Spanish bonds.
The USD/JPY Channel: The chart below shows the pair moving higher in a moderate, sawing motion. After reaching the channel top, the exchange rate has turned down, and is on its way to the lower end of the channel. Assuming a correction of similar size as the past ones, the USD/JPY could reach 100, or perhaps even 99. That would be a good opportunity to go long for holding periods of five to 10 days.
There could be a nasty stop run, especially if the 100-level is broken, so the trade would require plenty of leeway. If the move up after the bottom is gradual, similar to what happened after the number one and three bottoms in the chart above, it could make sense to wait for a bottoming-out on intraday charts. However, the move up after bottom number two in the chart above was a fast one, so after reaching the possible buy levels one could also use a buy stop at a higher level to enter the long position in the event there will be no bottoming-out process.
The idea is that ‘Abenomics’ is hitting “speed limits”: when the inflation expectations build up, bond yields go up, and the resolve of the central bank begins to be questioned – resulting in the USD/JPY’s oscillating grind higher. Also, the JPY shorts and Nikkei longs are probably the first two that institutions think of when they want to lower their market exposure. The huge drop in the Nikkei after a negative day in U.S. stock markets is one sign of this.
Get The News You Want
Italian and Spanish government bonds: The yields have oscillated between moderately normal and high levels implying partial default – always saved by the ECB, first with the SMP then with LTRO. After the darkest hour of the euro crisis in 2012, the ECB came out with its promise to do “whatever it takes” with the conditional OMT-programme. Ten-year bond yields have hit crisis lows, but nothing has changed in the economies – growth is elusive, unemployment is record high and budget deficits are unsustainable. The only positive factor has been the continuous relaxation of the fiscal targets and the ECB’s promise of support. With the repayments of the LTRO loans, liquidity in the euro area banking system is getting tighter. There is talk of referendum on the euro and EU-memberships in both countries.
Yields have moved higher over the past few weeks, and there are many reasons why the OMT-promise might not be enough to keep yields rising further: domestic reasons in both countries, the need for Merkel to sound tough before her elections, the ECB’s empty toolbox and as The Economist reported, sleepwalking by European leaders. In addition to yields, credit default swap prices have also hit crisis lows and are showing signs of bottoming out. Should these developments in the credit market continue, the markets might call Mario Draghi’s bluff and we would be in for the showdown of the decade. The EUR/USD would obviously be hurt by a bond sell-off. I am not saying that yields necessarily turn higher from here, but I am fairly certain that we have probably seen the lows in both countries’ bond yields.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.