In the G-20 currency sandbox, currency pairs such as the euro and dollar-yen have held in tight ranges recently, leaving traders to explore other more volatile choices in emerging markets and commodities.
Both the euro and yen have been held prisoner lately by expectations about further central bank easing that do not pan out quickly enough.
The market positions for the ECB or BOJ to ease and then the euro and yen weaken initially. Then, too many people have the same position, i.e. euro and yen shorts (i.e. deemed right position) and are forced to unwind these positions and the euro and yen rally
The euro was trading at $1.3815 and dollar-yen at Y102.35 Wednesday afternoon, after trading in respective ranges of $1.3673 to $1.3906 and Y101.33 to Y104.13 this month.
Euro-dollar topped out at $1.3967 March 13 and subsequently slipped, driven by profit-taking on dollar short positions as well as currency jawboning by ECB officials.
Dollar-yen peaked at Y104.13 just after the new Japanese fiscal year began.
Market players were penciling in further yen weakness later in Q2, but then Russian-Ukraine uncertainty and U.S. stock slippage put a dent in risk appetite and yen shorts began to be unwound.
In recent months, there has been a steady stream of clucking sounds from European Central Bank members about what easing measures may be taken, from negative deposit rates to the ECB’s own form of quantitative easing, to deal specifically with low inflation and a eurozone economy that is still not quite back on track.
Wednesday’s release of flash EMU manufacturing and services PMIs for April, both better than expected at 53.3 and 53.1 respectively, when compared to MNI’s medians of 53.0 and 52.0 and the 53.0 and 52.2 readings seen in April, showed promise, but did little to address the larger issues still present in the region.
As evidence, Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, N.Y. pointed to the Eurostat release, also earlier Wednesday, of a report “Maastricht ratios for 2013,” which is the official tally of which country is above or below official ceilings.
“The debt-to-GDP ratio for the Euro Zone rose in 2013 to 92.6% from 90.7% in 2012 – the ceiling is 60%,” Weinberg said.
The eurozone’s fiscal deficit, as a share of GDP, fell to 3.0% (in line with the mandated ceiling) from 3.7% in 2012, he observed.
Only five of the 18 EMU countries had debt-to-GDP ratios below the 60% ceiling – Estonia at 10%, Latvia at 38%, Slovakia at 55%, Finland at 57% and Luxembourg at 23%, with Germany (“the champion of fiscal austerity”) at 78%, down from 81% in 2012, Weinberg said.
“Poor Greece topped everyone, with a 175% debt-to GDP ratio, up from 157% in 2012,” Weinberg said.
It is unlikely that any “remedial or punitive action will be taken against any member country as a result of overshooting its public sector debt or fiscal deficit ceilings, although there may be some bluster in Brussels above ‘excessive deficit actions’ against specific member states,” he said.
Then there is Japan, where the market expects the Bank of Japan to pull out the big guns of further quantitative easing, beyond QQE, i.e “quantitative and qualitative easing,” if the consumption tax hike implemented April 1, has a sustained negative effect on the economy.
The BOJ board is widely expected to leave the monetary policy target and asset purchases unchanged at its April 30 meeting.
Some economists forecast the BOJ will conduct more easing in July if data show a slump in demand after the April sales tax hike is sharper than expected. (See MNI mainwire at 22:10 p.m. for further details)
Credit Agricole strategists looked for the BOJ to implement new monetary policy easing in June.
“The decision at the April or May meeting would be premature, as the Bank cannot obtain enough information to revise its economic assessment by then, especially as to the impact of the VAT hike on 1 April,” they said.
“Meanwhile, given the time lag of monetary policy effect, the decision at the July meeting would be too late in boosting the July-September GDP, which will be the key to the government’s final decision on the additional VAT hike from 8% to 10% in October 2015,” the strategists said.
In terms of possible BOJ action, CA looked for the additional monetary easing to include: 1) adding to monthly outright purchase of long-term JGBs, from JPY 6.7 trillion to JPY 8.0 trillion, 2) doubling annual ETF purchase from JPY 1 trillion to JPY 2 trillion, 3) doubling annual J-REIT purchase from JPY 30 billion to JPY 60 billionn, 4) as a result, raising the target on annual increment of monetary base (MB) from JPY 60-70 trillion to JPY 70-80 trillion, and 5) thus lifting the end-2014 target on outstanding MB from JPY 270 trillion to JPY 280 trillion.
They would view these measures as a “fine-tuning of the current policy.”
If you can’t or won’t trade the euro or yen – what other choices are there?
Traders have turned to Aussie and dollar-Canada, mainly because there have been more directional plays in these currency pairs.
Earlier in the year, after Aussie fell from a January 13 high of $0.9086 to a low of $0.8660, the market was geared up for further Aussie losses, with a move to $0.8200, if not the May 2010 lows around $0.8065-70 envisioned.
The market got caught short Aussie and was squeezed when data sets began to improve and Reserve Bank of Australia began to shift less dovish.
From the January lows around $0.8660 to the April 4 peaks near $0.9461, Aussie rose 9.2%.
Compare that to the 3.6% rise in the euro from its 2014 troughs near $1.3477, seen Feb. 3, to the $1.3967 2014 peak, seen March 13.
In contrast, the Canadian dollar rose 3.7% in less than three weeks from the March 20 C$ lows near C$1.1279 to the April 9 C$ peaks at C$1.0858.
Traders Wednesday saw scope for a further rise in dollar-Canada, potentially back to the April peaks, and beyond.
They pointed to M&A support for the pair, given this week’s announcement that William Ackman of Pershing Square Capital Management plans to partner with Quebec-based Valeant Pharmaceuticals International to acquire U.S. based Allergan for $46 billion, $14-$14.5 billion of which will purportedly be in cash.
Aussie was trading at $0.9282 and dollar-Canada at C$1.1032 Wednesday afternoon.
In the emerging market world, there were clear winners, such as the Korean won and Mexican peso and clear losers such as the Ukraine hryvnia and Russian ruble.
Dollar-won fell from a high of Krw1082.90 March 21 to a low of Krw1031.55 April 10, with the Korean won rising 4.7% over this period despite talk of persistent Bank of Korea intervention.
The Mexican peso fell sharply at the start of 2014, with dollar-peso peaking at Mxn13.6063 January 24, with the peso, likely other EM currencies, weighed by what was at the time new concerns about China’s growth prospects.
From the January peak to the trough of Mxn12.9397, seen April 8, the Mexican peso rose 4.9%.
Dollar-won last traded at Krw1039.75 and dollar-peso at Mxn13.0865.
Whether this trend of shunning G-3 currencies continues or changes will hinge on the outcome of the April 29-30 Federal Reserve meeting as well as market reaction to the May 2 release of U.S. non-farm payrolls for April, which could shift Fed sentiment, analysts said.