Nine Things to Know Before BOE and ECB

The immediate focus is on today's BOE and ECB meetings. Even though no change is policies are expected, there is some uncertainty whether the BOE makes a statement and how hard ECB Draghi leans against the rise in short-term European rates. However, we identify nine other developments to be aware of today:

1. The US dollar is mostly within yesterday's ranges against the major currencies. There are a couple of notable exceptions. The dollar has traded above JPY100 for the first time since July 24. It is consolidating just below there prior to the start of the North American session. As we have noted, there is a strong correlation of returns between the Swiss franc and yen. The dollar has also traded above CHF0.94 for the first time since July 22. There was little market reaction to news that German factory orders fell 2.7% in July.  The market had anticipated a 1% decline.  However, the June series was revised to show a 5% gain rather than 3.8% that was initially reported.

2. The Bank of Japan left policy on hold and tweaked upwards its economic assessment. Although there are widespread expectations for the BOJ to ease policy more, BOJ Governor Kuroda's comments suggests he is certainly in no hurry. He did hold out the possibility though that if the sales tax, which increasingly looks likely to be implemented, threatens the economy, the BOJ could act. It seems as if fiscal policy may also be used to mitigate the impact.

3. For the third consecutive week, Japanese investors sold foreign bonds. During this three week period, they have sold JPY1.751 trillion of foreign bonds. In the previous six week, Japanese investors bought JPY5.239 trillion of foreign bonds, which was the first sustained buying under Abenomics. Japanese investors bought a small amount of foreign stocks for the second week for a total of JPY75 bln. In the previous eight weeks of selling, they had sold JPY480 bln of foreign shares. The foreign appetite for Japanese shares has cooled considerably. They have sold a small amount for the past two weeks and in five of the last six weeks. In the first half of the calendar year, foreign investors bought $85.6 bln worth of Japanese shares. Here in Q3 they have bought a net $7.5 bln.

4. The Australian dollar's upside momentum has stalled just shy of the $0.9200 area. News of an unexpected trade deficit warns that the decline in the Australian dollar may not yet be sufficient to reverse the negative terms of trade impulse. A trade deficit of A$765 mln was reported for July. The market consensus was for A$100 mln surplus. And to add insult to injury the June surplus was revised to A$243 mln from A$602 mln. Overall exports were flat. Iron ore imports rose, though coal fell. Rising fuel prices and a falling Australian dollar helped lift imports by 4.1%.

5. The New Zealand dollar, which has also been a strong performer in recent days, has also pulled back. This is not only in sympathy with the Australian dollar. We note that Finance Minister English, often verbally pressing for a weaker currency, apparently told parliament that the $0.77-$0.78 exchange rate is "not bad". Against the US dollar it has off about 12% since the early April high.

6. Sweden's Riksbank left policy on hold, but by leaving its forward path unchanged--meaning no rate change until the end of 2014, the market saw it in dovish light, especially with news that service output contracted 0.2% in July. The euro rose nearly 1% against the krona, but the upper end of the August, near SEK8.80 remains intact. Governor Ingves offers an optimistic outlook, with the economy is past its worst. He remains concerned about household debt levels, but is pointing toward macro-prudential tools, like amortization requirements, as one possibility. 

7.   European bond markets are under some pressure today, with benchmark yields up 3-6 bp in the euro area and US 10-year yield is testing the high from late August near 2.93% ahead of today's data (which includes the ADP employment report and service sector ISM).  Spain sold 10-year bonds today at 3.477%, which is the least since May.  In contrast, France sold roughly the same amount for 10-year bonds, and although the yield was 2.57, it was the highest yield since May 2012, when Hollande was elected.  Four months ago, it has paid 1.81% on new 10-year bonds. 

8.  Late yesterday, the IMF indicated a significant shift in its economic assessment.  It now suggests that the emerging market economies are not driving the world economy.  That engine has gone back to the US and the high income countries.    That said, the MSCI Emerging Market equity index is up about 0.3% today to reach a two week high.  It has been helped by the sixth consecutive advance by the MSCI Asia-Pacific Index, during which time it has risen a little more than 4%.   

9.  Indian markets had a collective sigh of relief today, after the new central bank governor outlined plans to strengthen the financial sector.  Stocks rose, on an increase in volume, and by more than 2%, led by a nearly 8% rise in financials.  While most sectors were advancing, the Indian tech sector was off 3.5%.    The Indian rupee is up about 1.3% on the day.  The US dollar low was near INR65.53 in early Asia, but has been trading back above INR66.00 in  Europe.