Fragile Tone Continues

The global capital markets that stabilized yesterday, still seem fragile today.  The yen was sold in Asia for the second consecutive session and gold also continued to post corrective upticks, but there are signs that the animal spirits have not been rekindled.  Japanese government bond yields are higher, ahead of tomorrow's 20-year bond auction.

The market has been reluctant to extend yesterday's gains in the euro and Australian and Canadian dollars.  Sterling's gains have actually been reversed and it has been sold to an eight day low against the dollar and a five week low against the euro.   

The Swedish krona is actually the weakest of the majors today, falling more than 1% in response to the dovish shift by the central bank.  While the Riksbank kept rates steady as widely expected, it lowered its trajectory for interest rates to 0.9% by the end of next year from 1.2%.

Governor Ingves, who has resisted the pressure from the dovish board member, did soften his opposition and new recognizes that a rate cut is more likely than a rate hike.  The krona weakened in response, with the euro rising to near 2-month highs near SEK8.4750.  Stronger resistance is seen near SEK8.50.  

The fundamental source of sterling's decline may be traced to the mixed employment report and the MPC minutes, where Governor King was out-voted for the third consecutive meeting.  The government's (ONS) labor report moved in the opposite direction of the ILO report.  According to the government the unemployment rate was revised lower in Feb to 4.6% and that is where it remained in March.  The ILO its measure of unemployment rose to 7.9% from 7.8%.  The government said the claimant count fell by 7k.  The ILO shows employment falling 2k (instead of rising by 60k as the Bloomberg consensus expected).   

Also weighing on sentiment was news that average earnings (reported with another month lag) slipped in February to 0.8% from 1.2%.   The economic models that many use would suggest that the weakness in wages should exert downward pressure on inflation.  Yet, as we saw yesterday, UK CPI remains in the 2.7%-2.8% area, where it has been for the past six months.  Even the core rate is sticky near 2.4%.  

The BOE minutes were not surprising.  The vote to extend QE remained the same 6-3 split as has been the case since the Feb meeting.  The minutes suggest that the Funding-for Lending Scheme (FLS) may be extended, but with Carney's arrival in July, the window appears to be closing to expand gilt purchases in order to give the new governor a clean slate. 

Technically, sterling has faltered into front of the resistance we noted near $1.5425.  A break now of $!.5240 area could signal another cent decline to test the trend line drawn off the mid-March low near $1.4830 (the multi-year low) and the early-April low near $1.50.  That said, the intra-day momentum indicators are over-stretched, warning North American traders against piling on at this juncture.  

The Australian dollar has been turned back after approaching the resistance we noted yesterday just above $1.04.  Headline news that imports fell 1% in March may not have been the culprit, but the detail that imports of cap good fell 11% on the month was more disturbing.  It underscores fears the mining boom is over. Moreover, with Australian commodity prices falling, despite the fall in imports, exports are set to soften as well.  

What had been a positive terms of trade shock is now moving into reverse.  Part of the problem is that the Australian dollar is not unwinding its gains sufficiently, in part due perhaps to the global investor and central bank demand.   This prompted one notable economist, one of the architects of the float, to warn of the need for intervention.   We do not think it is likely, but it does way on nervous longs among the speculative community. Moreover, on an intra-day basis, the Aussie is trying to building a base near $1.0350 and our bias is for a bit of a recovery in North America today, with the $1.0400-10 being an important hurdle. 

The euro is uninspiring, as it trades in a relatively narrow range at the upper end of yesterday's range.  A break of $1.3130 now would sour what appears to be a flattish consolidative tone.  The yen remains very much in the center of foreign exchange market.  At JPY98.35, the dollar has retraced 68.2% of the losses seen since last week's multi-year high.  Given what we believe is the importance of Japanese leadership, we suspect the North American session will not finish with the dollar above there.  

At the same time, our conviction level that the G20/IMF meetings will not criticize BOJ policy continues to grow.  We think the market mis-understood last week's Treasury report on the foreign exchange market.  The market seemed to focus on the statements that indicated it was watching developments closely instead of what we think the real signal was and that is that Japanese officials are back into compliance with the G20.  

The IMF Deputy MD Shinohara comments suggest the official tact--no problem with current policy aimed at domestic considerations, but monetary policy should be complimented with fiscal and structural reforms.  He also played down the recent volatility, claiming that the yen's volatility was not excessive (otherwise it would beg for a response) and that JGB volatility was temporary. 

The US economic calendar is light, with the main feature being the Fed's Beige book, prepared for the April 30/May 1 FOMC meeting.   We expect to see anecdotal reports of economic moderation after what still appears to be near 3% annualized growth in Q1. 

Lastly, we note that Brazil's central bank meets late today.  Most expect a 25 bp hike in the Selic rate, the first since July 2011.  A Bloomberg poll found 37 of 58 of those surveyed look for a 25 bp hike.  The remainder have it remaining on hold.   The dilemma for policy makers is that growth has slowed, while inflation has firmed.  Last year's growth of less than 1%, was the weakest more than a decade, while inflation last month was rising at its fastest clip in since late 2011.