- Quarter-end flows impact bond markets more than FX
After all the hype of some potentially dramatic end of month/quarter/Japan fiscal year-end flows, Friday went out with a whimper not a bang. The USD was mixed on the day, equities modestly firmer and bonds weaker (and much weaker into the close, to the consternation of many in the bond market). US personal income was weaker than expected but spending was stronger at +0.8%. The Chicago PMI at 62.2 down from 63.0 was on the soft side of expectations but our economists maintain their forecast for a small bounce in today’s nationwide manufacturing ISM from to 53.3 from 52.4 (consensus 53.0). In bond markets, a reduction in the duration of the Fed’s planned ‘Twist’ bond buying in April relative to March was being held responsible for the longer-end sell-off – more purchases in the 5-7yr sector and less in the 10-30yr area of the curve. Overall weakness in bonds was confined to the US Treasury market, where 10s ended the day some 6bp higher while the equivalent Bund yield was -1bp. Should the moves stick, this would play to pressure on EURUSD in the early part of the new week, although offsetting this to some extent is the fact that most Euro-peripheral spreads tighter are versus Germany (Italy -10bps on the day, Spain -11bp, latter after the 2012 Spanish Budget was approved). Lastly, and as expected, European finance ministers approved an increase in the overall size of the Eurozone firewall to EUR700mn, with an accompanying claim that this rounds up to nearer 800bn once other bilateral assistance is accounted for.
- USDJPY higher on new outflows, US yields; but exporter hedges to weigh
USDJPY benefited from the NY Friday afternoon back-up in US yields, and the moves – both in US yields and in USDJPY – have been extended this morning. The Bank of Japan’s quarterly Tankan showed some improvement even if disappointing expectations for more, but crucially the Tankan showed that large manufacturers’ expectations for USDJPY
over the coming financial year were at 78.14, a record low. While the trade balance no longer so clearly favours exporters, the current level is clearly attractive vis-a-vis the assumed FX rate, suggesting that some front-loading of exporters’ hedging programmes is likely, weighing on USDJPY. In the very short term however, the start of the financial year often sees outflows of risk capital, which should provide some support for USDJPY this week.
- Chinese PMI should put hard-landing fears to rest; RBA on hold tomorrow
Those risk-seeking flows may be encouraged by Sunday’s China March manufacturing PMI, which came in surprisingly strong. The 53.1 print should reverse the recent slide in market confidence about the Chinese economy that has weighed upon risk in general and the AUD in particular. The PMI rebound supports the RBA’s apparently relaxed stance on China – and suggests that a similar tone will be maintained at tomorrow’s RBA meeting. Australian building approvals were extremely weak and this has taken some of the shine off the China print, but one month’s softness in the housing market is unlikely to spur the RBA into action. Our economist’s call remains that the central bank will be on hold all year, and with markets pricing in almost a full rate cut over the next two meetings, there is room for further upside in AUDUSD as that pricing is trimmed back.
- IMM data suggests futures players lagging JPY moves, leading GBP
Friday’s IMM data was interesting in several respects. The continued building of short JPY exposure came during a week when USDJPY fell back quite sharply from its Y84+ Jan 21st peak (see chart). IMM players continue to run much higher long-AUD exposure than long NZD, suggesting that positioning leaves scope for AUDNZD to fall further. Short GBP
positions continued to be trimmed and this seemingly had a hand in GBPUSD’s run up in the week through March 27. See our FX Strategy Flash: IMM Positioning for full details.
BNP Paribas