- Spanish auctions the litmus test – with the potential for a significant rebound on a good result
The USD held strong against most G10 currencies while equities closed in a slump. With an empty US calendar and no headlines, inertia seemed to have carried the markets through the end of the NY trading day. GBP and SEK took the top spot against USD thanks to their respective central banks, but with central bank meetings and minutes out of the way, the market direction will once again likely be steered by Eurozone peripheral stress. The litmus test of investor appetite for peripheral Europe will be today’s Spanish bond auctions (2Y, 10Y), and a decent result (perhaps as a result of improved post-Easter liquidity) could be enough to turn market sentiment around. Sentiment may also take some cheer from reports of progress on the IMF fundraising drive, with MD Lagarde announcing further commitments, taking the running total to USD 320bn of the stated 400-500bn target. Other threats are unlikely to derail any rebound: the market will see another ECB member (Praet) weigh in with his views on the Eurozone situation and the SMP program, but he is unlikely to surpass Bundesbank head Weidmann, who insisted that it was not the ECB’s job to solve Spain’s problems. French elections this weekend look unlikely to spring any surprises, with polls suggesting comfortable progress to the May 6 second round for President Sarkozy and Socialist challenger Hollande.
- Japan trade balance deteriorates, but focus remains on FOMC, BoJ next week
As expected, Japan’s March unadjusted trade balance fell back into the red, and on a seasonally-adjusted basis was larger than expected. There were some positives in that the numbers showed a significant pick-up in activity, but the jump in exports was more than outweighed by the fuel-driven rise in imports. The last of Japan’s 54 nuclear reactors is due to be idled on May 5, and while there has been some progress on the politics of restarting some of them ahead of likely summer power shortages, a full-scale restart remains a distant prospect. In the meantime, imports of fuel are likely to preclude a return to a trade surplus. But we remain of the view that the trade deficit is less important (in any case the current account will remain in positive territory) than capital flows, and therefore next week’s US and Japanese policy meetings will remain the focus. BoJ Governor Shirakawa this morning repeated his pledge to continue with monetary easing, but once again stressed that monetary easing has its limits and that measures to restore the sustainability of public finances are essential. It remains to be seen whether Shirakawa’s pressure will have any impact on the debate over fiscal reform, progress on which we see as essential for sustained easing from the central bank. Meanwhile markets have likely already discounted another expansion of the balance sheet next week of about JPY 5trn; as such, for USDJPY to rally further, the BoJ would have to surprise the market by either a larger expansion, an extension of the maturity on purchased JGBs, or by increasing the current inflation target. We do not expect any such moves, and so we think the topside on USDJPY is limited from here; however, on the downside, the political pain threshold for the authorities has likely risen, and jawboning from the MoF should keep USDJPY supported above 80.
- US Data back on the calendar today
Following an empty US data calendar yesterday, today we get US initial jobless claims, Philadelphia Fed Manufacturing Survey and existing home sales. We expect initial jobless claims to tick down from the week. The March employment report squashed optimism of a robust US recovery to some extent. After the March payroll number, employment data have become ever more important as they will be the likely catalyst to drive the Fed to further monetary easing. The Philly Fed index, which is often considered a good proxy for the ISM, may be key in boosting market sentiment. We do see an improvement on the month. Existing home sales, however, should prove to be much less of an event.
BNP Paribas