With the S&P (+0.72%) making another new all-time closing high, Asian equities are trading broadly higher with the Hang Seng +0.7% and Kopsi +1.2% as risk assets continue to rally. It seems that expectations of a prolonged period of central bank liquidity continues to drive risk and this was further boosted yesterday by the ecoa set audio alert allcombination of lower inflation and softer data. In Europe, German inflation rose less than expected in April (+1.2% vs +1.4%) which was met by a near handful of disappointing sentiment surveys. On the other side of the pond, the Dallas Fed report came out softer (-22.8pts vs -15.6 exp) and the latest core PCE deflator showed renewed downward momentum which is the Fed’s preferred inflation metric, so these latest readings give the FOMC more ammunition to stick with its current policy.
This has seen the USD continue to trade heavily across the board, with the commodity currencies leading the way higher in the G10 space overnight, although flows have been relatively light with the holiday in China and the middle of Golden Week in Japan. In terms of the FOMC, our US economic team expects the Fed to reiterate its easing bias by continuing its current pace of open-ended Treasury and MBS purchases. We see limited scope for the Fed to surprise as whilst they can sound dovish there is little they can do which will be a surprise. We think that tapering has been priced out until Q1 next year but no one has priced in more QE. From a currency perspective, George still thinks the USD weakness should run out of steam. It’s month end today and with US equities ending the month little changed, there is no strong USD signal for the fix tonight, resulting in disparate signals across USD pairs. In brief we think we should see JPY selling as JPY hedges are increased, and USDCAD selling (with both USD signal & performance signals in the same direction)- most of the other signals weak this month.
Overnight we had mixed data out of Japan. Signs of Abenomics boosting domestic spending was seen in overall household spending which rose a real 5.2% yoy in March a 9-year high. Retail spending was much weaker, however. And whilst the jobless rate fell to 4.1% in March, the level of employment was little changed. The rebound in IP in March was also anemic, leaving production down 7.3% on a year earlier with manufacturers seemingly not expecting much improvement over the next couple of months. George thinks that the Nikkei is the best indicator to watch for signs of Abenomics continuing to come through. USDJPY traded heavily overnight inline with the softer USD. In the medium term however, we remain JPY bears and think these corrections are healthy to flush out the weak longs. We still think it’s only a matter of time before we break the 100 level. Our order book is picking up a lot of longer-term bids lower. The EUR remains supported helped by the softer USD as well as the rally in European fixed income (particularly Italy and Spain). This is inline with expectations for a refi cut which benefits fixed income. Consensus is for 25bp cut in refi with nothing else. George argues however that we may get a discussion on negative depo rates which no one has mentioned although ppl were talking about it in dec/jan – so potential is for more dovish surprise. As such, our traders want to be short EUR going into the meeting. Our order book has topside stops building up to 1.3180 and bids building on downside at 1.30. We remain short EURGBP. In GBP, there is stress in order book on the topside from 1.5550 to 1.57, so we expect EUR to underperform GBP.
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Deutsche Bank