ECB Talking Heads May Give EURO Clues

Last week, market participants were looking for “firm” directions. The never got a clear answer, but we do know now that both the Fed and the ECB remain on course. The ‘how, why, when and where' that helps investors formulate their own directional play is still partially missing. This is does not suggest that forex opportunities do not exist, it makes longer term directional play that bit more difficult, but does allow the opportunity for more intraday volatility to occur within the worlds largest asset class – the forex market. One has to read carefully between the lines to formulate the own conviction.

At the beginning of last week three “hopes” helped to provide support for the various asset classes – hope for Chinese stimulus, something from Draghi and company and a massive US March jobs report. For each the outcome was disappointment:

1. China happened to deliver a “targeted mini stimulus” with no price tag. It basically repeated the investment priorities put forward by Beijing in late 2013 and early 2014.

2. The ECB stood pat again, and repeated all of the policy maker's familiar talking points. Draghi asserted that inflation would turn around of its own accord in the coming months, although he did begin talking about the theoretical possibility of a quantitative easing program for the Euro-zone if it can't. He conceded that the council did discuss potential rate cuts and the merits of a QE program (as well as lower rates and a negative deposit rate), but on inflation he repeated that while the March Euro-zone inflation report was a surprise, the ECB still expects higher inflation in the months to come. It was a seasonal factor that supposedly distorted March inflation levels, 70% of the fall-off in inflation was due to lower food and energy prices.

What about the EUR? Asia and Europe so far have been unable to react to the price action post the US jobs numbers (last Friday on the day it ended up being a zero sum game). This morning's slow grind towards €1.3720 is not a convincing rebound, but one that seems to be more uncertain rather than a bullish conviction. The market is not convinced that the ECB's latest bombardment of “rhetoric coupled with policy inactions provides a ground for a EUR sell off but central bank divergence.” For the EUR bear the single currency right hand side feels the most vulnerable. A plethora of ECB speakers today will hopefully shed some light on the intentions of the ECB in respect of non-standard policies. The techies expect the €1.3690 support level to continue to hold.

3. Last Friday's US jobs report was good, but not near great. The headline print was slightly higher (+192k and +6.7% unemployment rate), but other weak job trends remain. Many analysts were concerned about the flat hourly earnings component (they grew +0.4% in February) and the continuing weakness in underemployment. Yellen cited both issues at her post-FOMC decision press conference as reasons for rates to remain “low for an extended period.” What also has the IMF and Christian Lagarde worried is that US trade data remains sluggish with lower overseas demand weighing on US exports – this is not just a US problem. Expect many to downgrade their outlooks for various economies Q1 growth.

In Japan on April's fool's day, PM Abe and his government raised the consumption sales tax from +5% to +8%, and this while the weak Tankan survey data suggested that Abenomics is facing headwinds. The Japanese Government bond market (JGB's) remains firm, helped by the obviously uninspiring domestic economic data. The current domestic economic situation will require Governor Kuroda and company at the BoJ to eventually be more proactive. The market believes that the BoJ has little choice than stay with accommodative policies longer. This should weaken JPY further. Being short JPY on the crosses and outright to the USD has been a market “go-to trade” for some time and the possibility of any further easing will only ever support it – it's the timing of owning the trade that is the most important. Currently the post US payroll slide 10-year slide in yields is taking its toll on long USD/JPY (¥103.10). The key bearish day posted on Friday suggest further downside within the current range and asset allocation flows away from high beta momentum stocks.

Follow US yield – this will helps yen traders decide want to do. The fixed income market is beginning to price in further BoJ policy easing beginning in July. Last week this allowed USD/JPY to print a nine-week high on Thursday – it made a few runs above the psychological ¥104. The BoJ has begun its two-day policy board meeting with a decision due tomorrow. The board is expected to maintain their monetary policy targets, as there are no signs that downside risks to growth and inflation are increasing at this point.

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