Subdued Markets Ahead of Central Banks and US Jobs Data

The week's big events, the central bank meetings in Japan, the UK and euro area, and the US monthly jobs report lie ahead and the global capital markets are seeing fairly subdued action awaiting the new information.

For the fifth time in six sessions, the euro has dipped below $1.28, but it has only managed to finish the North American session once below there and that was in the middle of last week.  At the same time, it has not traded above $1.29 since March 25.  

Sterling slipped to new ten day lows after being rebuffed for the second time in the $1.5260 area.  It found a good bid near $1.5075, ahead of the band of technical support seen in the $1.5000-50 area.  The CIPS construction survey was similar to the manufacturing survey insofar as they both showed improvement from February, but less than the consensus expected.

The dollar has been confined to a about a third of a yen range against the Japanese currency.  The greenback recovered from yesterday's drop to JPY92.50, but has run into offers in the JPY93.50-70 area.  The price action in the Nikkei was considerably more impressive.  After gapping lower yesterday, the Nikkei surged earlier today rising almost 3%, the biggest gain in nearly a month,  led by a 9% rise in consumer services.   

The Australian dollar is firm and is extended its recovery from the dip below $1.04 on Monday.  Last week's high was set near $1.05 and the Aussie has yet to really challenge it.  Still, the news stream is positive, with Australia reporting a much smaller than expected trade deficit in Feb of A$178 mln, not the A$1 bln that the consensus forecast.  It is the smallest deficit since Dec 2011, when a small surplus was reported.  As we have seen elsewhere in the region, the Fed trade figures are skewed by the impact of the lunar new year.  

In any event, news that China's service PMI rose to 55.6 from 54.5, following news that the manufacturing PMI rose to 11-month highs is seen as supportive of the Aussie.  We note that RBA Governor Stevens, whose term was to end a few days after the September election was re-appointed today for a new 3-year term.  Separately,New Zealand reported that powdered milk prices jumped again (due to the drought) to record levels and this is helping to underpin the kiwi dollar as well.  

Of the three major central banks that meet tomorrow, only the BOJ is widely expected to move.  It is the long awaited BOJ meeting that the Abe government's team is in place.  There is no doubt that BOJ's Kuroda is going to announce a shift in the regime.  There are a number of technical moves that are anticipated, but at a high level what is happening is an broadening, deepening and accelerating of quantitative easing.  It is broadening in terms of the range of instruments, including longer dated JGBs.  It is deepening in terms of combining the monthly purchases of JGBs under the rinban program with the asset purchase program.  It is accelerating the efforts by bringing forward the open-ended nature of the operations that the prior governor had earmarked to begin at the start of 2014.  

Over the past several weeks, we have outlined our non-consensus skepticism about how much more yen weakness can be driven by Abenomics.  The yen's slide over the past several months is in part the discounting mechanism of the market at work.  It has been anticipating aggressively easier monetary policy.  That has fueled both yen weakness and Nikkei strength.  While we recognize a high degree of uncertainty over the market's initial reaction to tomorrow's announcements, we see investors vulnerable to disappointment and/or buy the rumor sell the fact type of activity.  

In terms of the other two central banks, the BOE is likely to be less eventful.  When the BOE doesn't do anything, it does not talk about it very much.  On balance, the data since the last MPC meeting has not changed sufficiently to suggest that Governor King has secured a majority behind his (and tow other members) call for a resumption of gilt purchases.  Recall that a majority had been concerned that renewed gilt purchases could weigh on sterling.  

There are some forecasts for the ECB to cut the 75 bp repo rate tomorrow. However, most, including ourselves, do not expect the ECB to move, but do anticipate Draghi to keep the door open.  Scope for a rate cut is coming not only from growth considerations, but also from a weakening of price pressures.  The flash EMU CPI released earlier today showed a 1.7% year-over-year rate, the fourth consecutive month that has seen pressure ease.  And even this may be over-stated by administered price hikes and tax increases.  As is often the case, the press conference will be more important and there we expect Cyprus to be addressed.