FX Today is about the Yen and the Australian Dollar

The US dollar is largely within yesterday’s trading ranges against the major foreign currencies today. The main exception is the Australian dollar, where the central bank kept rates on hold but encouraged the market to look for a rate cut next month. The unwinding of long AUD cross positions helped lift the yen after the BOJ reported the first decline in its monetary base in three years.  The dollar fell to its lowest level against the yen in nearly a month, with reported buying by Japanese importers helping to steady the greenback near JPY81.50. This in turn helped the other main yen crosses recover from earlier losses.

The yen’s strength weighed on the local share prices and the Nikkei shed 0.6%, while the regional benchmark, the MSCI Asia-Pacific Index rose about 0.3%. The inverse correlation (60-day rolling on percent change) stands at -0.35, which is the strongest inversion since late Nov 2010. There have only been a handful of times since 1990 that the inverse correlation has been greater than it is today.

News that China official non-manufacturing PMI rose to 58 after a sharp upward revision to the Feb series (from 48.4 to 57.3) helped the regional currencies. Chinese markets are closed through Wednesday, but the combination of the stronger official manufacturing and non-manufacturing PMIs should help boost confidence in the soft landing scenario. The head of the National Development and Reform Commission indicated that Q1 GDP, which will be released in about 10 days, is likely to be near 8.4%. The consensus was for 8.3%.

The Reserve Bank of Australia left rates steady at 4.25%. Yet the better Chinese data and the disappointment to those that had expected a cut today did not spark rally in the Australian dollar. Even anything, the RBA statement simply increase the market’s anticipation for a rate cut next month. It will take an upside surprise to the CPI figure due April 24th to dash such expectations.

The RBA’s comments that output growth is slower than previously anticipated, following yesterday’s dismal building approval data (-7.8% in February compared with consensus for a 0.5% increase) and today’s more mild disappointment on retail sale (0.2% vs consensus of 0.3), will keep the focus on domestic variables for the policy outlook.

As we noted previously, for the the most recent reporting week, the net long AUD futures positions grew because the shorts covered. Some players appear to be re-establishing the short positions and the Australian dollar has scope to test the $1.03 area and a break of there could spur another 2 cent decline, especially if the CPI moderates. The market anticipates 80 bp in cuts over the next 12-months.

The UK has followed up yesterday’s stronger than expected manufacturing PMI (highest in about a year) with a healthy construction PMI today. The March construction PMI rose to 56.7 from 54.3 in February and compares with expectations for a 53.5 reading. It is a 21-month high and is the 15th month above the 50 boom/bust.

Yet, gilts are slightly higher (yields lower), the FTSE is off about 0.25% and sterling itself has lost ground against both the dollar and the euro. Sterling has failed to build on yesterday’s gains, which had lifted it to its best level against the greenback since mid-November. It has been toying with the $1.60 level for more than a week. With the hourly momentum indicator beginning to recovery, it could be the first session since November 8 that it spends the entire session above $1.60.

Minutes from the recent FOMC meeting will be reported today. There are many participants who continue to look for QE3, but we do not expect much for them to hang their hats on in these minutes. Recall the FOMC statement recognized some improvement in the labor market and also higher energy prices.

Given that the Fed’s leadership thinks that quantitative easing has been successful, they are not about deny themselves such a tool if needed. However, as Operation Twist enters its final months, it would not be surprising to see more discussions of options, including extending the Twist or sterilizing additional purchases.