USDJPY pushed through a local resistance area this morning before tonight’s raft of Japanese data in the Asian session, including for inflation. Meanwhile, EURUSD doing its usual tease around the 1.3000 level.
We’ve got a two-day EU summit underway, at which we should observe the temperature of the relations between the EU commission and Merkel, who is now in the thick of her election campaign. It’s fairly clear that the German stance vis-à-vis the periphery is that significant structural reforms are necessary for Germany to open its purse. Today, Merkel announced that she was happy with the EU deal on bank bail-in rules (as Cyprus serves as a kind of template, one might argue…).
Various EU-wide confidence surveys are up shortly that may trigger a firmer break of 1.3000 in EURUSD after yesterday’s tease below that level, or a larger back fill that raises the threat of a more range-bound market for now back toward 1.3150 or even a bit higher before we try lower again. It’s worth noting that Spanish and Italian yield spreads to Germany have come back in sharply over the last two days (20-25 bps).
Yesterday afternoon, one of the Fed’s hawks, Lacker of the Richmond Fed, said that the US growth outlook looks sluggish for the next two years and that the Fed won’t be ready any time soon to actually reduce the balance sheet. “This asset purchase tapering is just slowing the rate at which we’re increasing the balance sheet…We’re not anywhere near decreasing the balance sheet yet.”
There was hardly any reaction to the leadership shuffle in Australia yesterday for the ruling Labor party (with former leader Rudd replacing Gillard). The Labor Party appears to be in dire straits ahead of the mid-September election, where it will likely find itself booted from power.
Chart watch: USDCAD
One of the charts I’m watching closely at the moment is USDCAD, to see whether support comes in ahead of the former high at 1.0420, and if not, at the 1.0400 area, just above where the first important Fibonacci retracement comes in. In any case, looking for support here soon as the pair may be ready to gear up for a go at new multi-year highs highs. Every rally since 2008 has eventually fizzled - could this finally be the one that extends?
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Looking ahead
Watch out for the US Fed’s Dudley out speaking later – he’s one of the top dogs on the Board of Governors, so the dollar could move on any rhetoric that adds a twist to the latest FOMC meeting. Jeremy Stein will speak tomorrow. (He’s the Board of Governor’s member charged with overseeing financial stability risks from Fed policy).
Most important, look out for Japanese data overnight, which includes May inflation, June Tokyo inflation and consumption activity-related data from May to see if Abenomics is beginning to move the needle on key indicators. We have an awkward situation this morning in which USDJPY is breaking up through local resistance (98.15 area Ichimoku daily cloud level), but bonds are very strong in early trade – normally not supportive of a JPY sell-off according to recent market correlations - and it’s tough to gauge the quality of a break when we’ve yet to see critical data. Some of the JPY weakness this morning is likely caused by noise about large issuance of so called “toshin” which are yield bearing instruments investing in foreign-denominated assets.
Stay tuned. It feels like the JPY is in more than a bit of a waiting period until the July 21 Upper House elections are out of the way and we can see if Abe’s “third arrow” of structural reforms will be repackaged/reformulated to promote more significant reforms. Judging from Mr. Abe’s popularity ratings, a victory appears assured, but he is keeping his reform cards close to his chest.
Economic Data Highlights
- New Zealand May Trade Balance out at +71M vs. +427M expected and +174M in Apr.
- New Zealand Jun. ANZ Business Confidence out at 50.1 vs. 41.8 in May
- France Jun. Consumer Confidence Indicator out at 78 vs. 81 expected and 79 in May
- Sweden May Trade Balance out at 5.7B vs. 8.8B in Apr.
- Germany Jun. Unemployment Change out at -12k vs. +8k expected and vs. +17k in May
- Germany Jun. Unemployment Rate out at 6.8% vs. 6.9% expected and 6.8% in May.
- Euro Zone Jun. Economic, Industrial, Consumer, Services Confidence Indicators (0900)
- US May Personal Income and Spending (1230)
- US Weekly Initial Jobless Claims (1230)
- US Weekly Bloomberg Consumer Comfort Survey (1345)
- US May Pending Home Sales (1400)
- US Fed’s Dudley to Speak on Labor Market (1400)
- US Jun. Kansas City Manufacturing Activity (1500)
- US Fed’s Lockhart to Speak (1630)
- New Zealand May Building Permits (225)
- UK Jun. GfK Consumer Confidence (2301)
- Japan Jun. Markit/JMMA Manufacturing PMI (2315)