Following the soft close for the US (S&P -0.07%), Asian equities are trading broadly lower, although it?s been a relatively quiet 24 hours with some trimming back of USD longs as we await “Fed Wednesday” when Bernanke will be delivering a testimony before the Joint Economic committee, and the latest FOMC meeting minutes will be published.
Evans spoke yesterday and sounded less dovish than usual. Evans said that the US economy had improved substantially and that he expects to see “self-sustaining (US) growth” at “escape velocity” in 2014. Evans added however, that the Fed is missing on both inflation and employment targets and he wants to see further asset purchases until the job market improves. We get further Fedspeak today with speeches from the St Louis Fed’s Bullard at 4.30pm and the NY Fed’s Dudley at 6pm. Both are FOMC voters. In terms of the USD trend, after last week?s moves, we think that some consolidation was inevitable ahead of Bernanke on Weds, but overall we don?t think this changes the broad USD higher theme with Saravelos noting that real yields in the US are still at their highs.
The JPY was back in focus overnight, with USDJPY initially selling off on more macro and fast money profit taking, but has since squeezed back higher on retail and Japanese bank buying and after backtracking commentary from Japan’s Economy Minister. Mr Amari said that he is uncertain on when the correction from a strong Yen will end. This marks a surprise change in tone from his comments on Sunday when he was quoted as saying that the “correction of the strong Yen is largely complete” and that a further weakening in the yen would negatively impact people’s living costs. As James Malcolm highlighted yesterday, we remain USDJPY bulls, continuing to look for a move to 110 by year end.
Elsewhere, EURUSD has continued to be supported in a quiet 24 hours as we wait for Bernanke tomorrow, PMIs on Thursday and IFO on Friday. This looks like a healthy retracement for now, some stops above 1.2930 look vulnerable but any chance to sell in the mid 1.29s looks like a good play with plenty of resistance towards 1.30 with a stop at 1.3030.
Finally, USDAsia is mostly lower overnight following a record low China fix which came in at 6.1911. NDF’s are 100-150 points lower and spot traded down to a low of 6.1309 and there has been good inter-bank short covering in spot. We re-initiated USDCNY shorts late last week and look to stick with that position from here. Despite USDJPY maintaining its bid tone TWD and KRW were the outperformers overnight. It seems in USDKRW we have seen some long USD liquidation as the North Korea missile test news dies down and together with good USD selling from exporters we are 0.8% lower in that pair. We saw some good offshore buying interest, around 150 Mio, around 1114 and agents are suspected at 1110, the low in spot, around 150-200 Mio so far. We did have a few comments from Finance officials in Korea about Yen and Bond flows (*CHOI SAYS WEAK YEN EFFECT ON SOUTH KOREA MAY INTENSIFY THIS QTR *CHOI SAYS GOVERNMENT MONITORING BOND MARKET INFLOWS, MAY BE ADDING TO FX VOLATILITY). Bond flows have mitigated the equity outflows so far this year so any attempt to curb bond flows would be a big negative for KRW. The USDTWD move also attracted agents bids around 29.89 all the way down to 29.80, around 200 Mio so far. Our main risk is long CNY and long MYR at this point.
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