Carnage Continued in Asia

The carnage continued in Asia after the more than 2% drop in the S&P 500 on Monday.  The Nikkei was crushed, falling 4.2%, which is the largest drop in 7-months.  Consumer and industrial sectors were the hardest hit and telecoms was the only sector to escape the sell-off, positing a 0.3% gain.  

The dollar has fared better against the yen than one might have expected, given that equity move and the fact that the Nikkei closed on its lows, just about the psychologically important 14000 level.    The dollar's low in North America yesterday was (according to Bloomberg ) JPY100.78 and the low in late Asia was JPY100.76.   With the S&P 500 trading higher in electronic trading, the dollar is back above JPY101.00 in early Europe. Initial resistance is seen near JPY101.40-60.

The major news though out of the Asia-Pacific was the changed tone by the Reserve Bank of Australia.  The RBA adopted a neutral tone, which had been anticipated by many market participants.  However, the tone of the statement was even more neutral, if such a thing is possible, than expected.  It is not just that the RBA indicated that the higher inflation expectations meant that a period of rate stability was justified, but, arguably, even more important, it dropped the reference to the Australian dollar as being "uncomfortably high".  This helped fuel a short squeeze that has lifted the Aussie above $0.8900 to record its highest level since mid-January.  It helped drag the Kiwi higher in its wake.

Recall that RBA Governor Stevens had previously indicated that the Aussie should fall to $0.8500, but a fellow member of the board called for $0.8000.  Given that the US is not Australia's main trading partner and, that under such conditions, the bilateral nominal exchange rate is not a very robust way to think about the economic implications, it was seen as a gratuitous

The $0.8925 area corresponds to a retracement objective of the decline off the January 13 high, just below $0.9090.  Intra-day technicals are overstretched and it would not be surprising to see the Aussie slip back to the $0.8830.

Aside from the UK construction PMI, the economic calendar in Europe is fairly light.  The highlight of the week and a significant risk event is the ECB meeting on Thursday.  The relatively resilience of the euro is surprising given the calls, including by a large German bank, that the ECB will ease policy further, including by a cut in the deposit rate.  We are less convinced that the ECB is ready to take such step when officials continue to play down the risk of deflation and the PMI data gives evidence for a strengthening recovery.

Of note, a poll out in Italy, suggests that under the new electoral reform, a center-right coalition (ostensibly led by Berlusconi) would win, without need of a run-off.  The center-left (Renzi) can make a fight of it, is trailing 36% to 37.9%. The 5-Star Movement is polling just shy of 21%.