ECB In Focus, While Australia Pokes The Panda


The capital markets are mostly quiet ahead of the ECB meeting, today's highlight.  The rise in US equities yesterday is helping lift equities today.

The MSCI Asia Pacific Index snapped a two-day fall, and Europe's Dow Jones Stoxx 600 is rising for the second session.  US shares are little changed.  The bond market is subdued as 10-year is hovering around 1.56%, while European yields are slightly firmer  The dollar is mostly firmer, with the Antipodeans and sterling the weakest.  The Swiss franc (FXf) and Norwegian krone are holding on to minor gains.  The liquid and freely accessible emerging market currencies are 0.25%-0.33% lower, but controversy over Turkey's reserves and the US preparing to recognize the mass killing of Armenians in 1915 as a genocide will not sit right in Ankara, and the lira is off around 1%. Gold edged closer to $1800 but stalled and is hovering around $1790. Oil is off for a third consecutive session, and below $61 a barrel, June WTI is near six-day lows.  

Asia Pacific

Ahead of next week's BOJ meeting, the Japanese government maintained its overall assessment that the economy is improving slowly from a low base.  However, it downgraded public spending and upgraded capex.  After adjusting policy in March, the BOJ is expected to stand pat next week.  At that March meeting, the BOJ scrapped its JPY6 trillion ETF purchase target and indicated it would no longer buy ETFs tied to the Nikkei 225.  When the market was off 1% on Tuesday, the BOJ did not step into the market as it had previously done.  However, yesterday with the market off 2%, the BOJ bought (~JPY70 bln) ETFs tied to the Topix.  Ironically, the Nikkei was up nearly 2.4% today while the Topix rose by 1.8%.  

The Australian parliament had given the government the right to review foreign deals struck by Australian states and universities last year.  Yesterday, the foreign minister announced it was canceling four deals, two of which had been negotiated by the state of Victoria under the auspices of China's Belt Road Initiative.  The deals had been signed in 2016 and 2019.  Canberra's relationship with Beijing had been stressed ahead of yesterday's decision.  Australia was the first country to ban Huawei from its 5G network and has been a vocal critic of Beijing's behavior, including the treatment of HK,  Moslems, and the lack of transparency about the virus's origins.  China absorbs a third of Australia's exports and has used it as a weapon to express displeasure with Canberra's foreign policy. Beijing responded sharply to the decision to nix the deals. 

The US dollar initially edged lower against the yen, falling to almost JPY107.80, and matching its lowest level since March 5, before rebounding to resurface above JPY108.00, where a $1.6 bln option will expire today.  Another option, for $1.3 bln is struck at JPY108.30, also expires today.   The greenback has not risen above the previous session's high since April 9.  Yesterday's high was just above JPY108.25, where the 5-day moving average is found.  The dollar has not closed above the 5-day moving average since April 2.  The Australian dollar is trading in about a 15-tick range in either side of $0.7750, where a A$565 mln option expires today.  More broadly, the Aussie appears to be in a $0.7700-$0.7780 range.  The US dollar initially threatened to extend its eight-day slump against the Chinese yuan and slipped to its lowest level since March 12 near CNY6.4825.  It rebounded back above CNY6.49 and managed to close the local session with the smallest of gains at CNY6.4910.  Against its CFETS basket, the yuan rose to three-week highs.  The PBOC set the dollar's reference rate at CNBY6.4894, which was in line with the average projection in Bloomberg's survey (FXY, FXA, CYB).  


It is not so much the ECB meeting that attracts attention today, as no one expects it to do anything.  Instead, it is President Lagarde's press conference that is the key focus.  There are two broad interests.  The first may be more about tone than content, but the issue is whether, despite the contagion wave, officials are more confident about the economic outlook.  The composite PMI moved back above the 50 boom/bust level in March for the first time since last September. The preliminary April report, due tomorrow, is expected to have stayed above it (even if not quite as high as the 53.2 reading in March, which beat all of last year's but the jump last July to 54.9).

The second key issue is about the ECB's bond purchases. Lagarde indicated in March that the executive board approved significantly increasing, but the weekly numbers arguably do not show much of an increase.  It had been buying around 14 bln euros of bonds a week under its Pandemic Emergency Purchase Progam, and now it appears to be closer to 17 bln a week.   At the same time, it should quickly be added, the dramatic rise in yields has abated.  Since the ECB met on March 11, the US 10-year yield is up less than two basis points, while the yield on the German Bund has risen seven basis points and the Italian BTP yield is 15 bp higher.  The hawks at the ECB are keeping the purchases on a tight leash, and the approval will be reviewed at the next ECB meeting (June 10).  Unlike the Federal Reserve that is committed to buying a fixed amount of Treasury and Agency bonds every month ($80 bln and $40 bln, respectively), the Eurosystem has maximum flexibility.  It draws on "envelope," which is the maximum that can be purchased through next March unless the executive board decides more is required.  

Of the last ten days that the ECB met, the euro has risen half the time.  If there has been a recent pattern, it may be sawtooth.  Beginning with the meeting last June, the euro has alternated between rising and falling on ECB meeting days.  That would seem to place importance on how the euro traded on March 11, when the ECB last met, and agreed to accelerate its bond purchases.  According to Bloomberg data, the euro rose by nearly 0.5%.  

Germany's constitutional court is allowing the ratification process of the EU's Recovery Fund to go forward.  Since both chambers of parliament have approved it, all that is left is President Steinmeier's signature.  The court said that it could not hold up the process given that the plaintiffs did not demonstrate that it was "highly likely" that the Recovery Fund would be found unconstitutional.  The court also said that it would seek guidance from the EU high court.  Some tried to link the decision to a small uptick in Italian bonds, but it seems to be a stretch.  Italian bonds were bid before the decision and roughly halving the gains by the close, which was actually a touch lower than where it was trading before the ruling.   That still leaves nine EU members to approve the measures.  It was hoped to be finalized by the end of the month, but this looks increasingly unlikely.  Poland may be the next obstacle.  A junior coalition member is balking, and it may take another month or more to sort it out. 

The euro is in a little more than a quarter-cent range today below $1.2050.  Yesterday, it briefly traded a hundredth of a cent below $1.20 but recovered to finish near session highs. On Tuesday, it had reached $1.2080, its best level since March 3.  The trendline connecting the January high (~$1.2350) and the February high (~$1.2245) comes in today near $1.2125.  Sterling stalled in Asia at yesterday's high near $1.3950 and was sold in early European turnover back through $1.3890 before bids emerged.  Yesterday's low was near $1.3885.  The week's high was set on Tuesday, a little above $1.40.  Chart support is seen in the $1.3830-$1.3860 area (FXE, FXB).  


The Bank of Canada announced yesterday it was reducing its bond-buying by a quarter to CAD3 bln a week.  The move was widely expected.  Last April, the Bank was buying CAD5 bln a week and pulled back last October to CAD4 bln.  At the time, it suggested its stimulative impact was unchanged as it shifted its buying to longer-dated bonds.  Yesterday's move was not accompanied by a similar announcement.  On the contrary, Bank of Canada Governor Macklem brought forward when the economic slack would be absorbed to mid-2022.  The market took the bait and brought forward the first rate hike until the middle of next year.  

The US is playing down the seeming optimism expressed by some Iranian leaders about progress on talks.  Some Iranian officials suggested that a deal was 60%-70% complete, but both sides, apparently addressing domestic audiences, had different messages.  The bottom line is that indirect talks will resume next week to focus on the sequencing of actions.  What sanctions are the US willing to lift in exchange for what concrete steps by Iran.  The US has suggested it is willing to consider lifting numerous sanctions on oil, industry, and finance.  The recent attack on Iran's top nuclear facility received little official denouncement from Brussels or the US. However, if such an attack took place in nearly any other country, the cyber attack would still be making headlines. Getting the US and Iran back in compliance with the agreement will take more time, and a deal is hoped for before the June 18 Iranian elections.  Iran produces heavy sour crude oil, and its capacity is estimated at 3-4 mln barrels a day.  

The US reports weekly jobless claims today.  A small bounce is expected after the outsized 193k decline in the week ending April 9.  Leading economic indicators, existing home sales, and the KC Fed manufacturing survey are also on tap but typically are not market-movers.  The virtual climate summit hosted by the Biden administration may make for headlines but are unlikely to have much immediate impact. Mexico reports its mid-April bi-weekly CPI.  The headline may slip a touch, and the core rate increase may slow, but the year-over-year rate is likely to firm toward 6% from 5.22%.  The increase will if anything, strengthen the market's conviction that the central bank will not have an opportunity to resume its easing cycle.  

The US dollar trading in a wide range against the Canadian dollar yesterday, and its net drop of about 0.9% was the largest decline since June 1 last year.  It is consolidating today below CAD1.2515. Yesterday's low was near CAD1.2460.  There is little of note on the charts ahead of the March 18 multi-year low of CAD1.2365.  Note that the lower Bollinger Band (two standard deviations below the 20-day moving average) is around CAD1.2480 today.  The greenback bottomed against the Mexican peso on Tuesday by MXN19.7850, its lowest level since January.  It has been consolidating below MXN20.00 since then. Above there, the initial potential extend toward MXN20.10-MXN20.15 (UDN, FXC).  

Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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