FX, stock markets sometimes move too much

June 22, 2016

FX News Today

European Outlook: Asian stock markets were mixed, with Japan underperforming amid Brexit jitters, with the Yen vulnerable to safe haven inflows. U.S. and U.K. stock futures are moving higher though and it seems markets are going with betting companies, which giver higher odds to a victory for the “Remain” camp than the polls. Bund and Gilt futures closed mixed yesterday, with Bunds outperforming, although the future already lost gains in after hour trade yesterday and with stock futures underpinned is likely to open lower. Today’s calendar only has Eurozone consumer confidence data, which we expect steady at -7.0 (median -7.1), leaving the focus fully on tomorrow’s vote on the U.K.

Fed’s Yellen’s Testimony: Fed Chair Yellen repeated the Fed will continue raising rates cautiously, in her prepared testimony before the Senate Banking Committee. She’s optimistic on further growth but noted there are still considerable uncertainties over the outlook. The Fed is monitoring the job market carefully to see whether the weakness in the May report was transitory, she said, and added it is important not to react to one or two reports (isn’t that what the FOMC did, however?). On the positive front, she said spending has picked up smartly while housing is recovering. But she cautioned that the Fed can’t dismiss the slow productivity growth. Brexit could have significant economic repercussions. Yellen cautioned the recent weakness in jobs is a loss of momentum, not an erosion in the labor market. She and the FOMC expect further improvement in the labor market in the coming year and look for other measures of unemployment to come down. And while the last couple of months of data were quite disappointing, it’s her hope and expectation that it is a temporary development. Other job metrics suggest improvement, including the unpublished LMCI numbers. She added though, that with the economy near full employment, job creation may naturally slow. The Fed will be monitoring the situation closely.

ECB’s Draghi’s Testimony: ECB’s Draghi leaves door open to act again saying that policy makers, “stand ready” if necessary. Draghi highlighted Brexit risks saying “in particular the ECB is ready for all contingencies following the U.K.’s EU referendum”. The Brexit risk aside, which would clearly mean all forecasts for Europe have to be rewritten, Draghi was clearly eager to keep the door to further action wide open and assure markets that the ECB hasn’t run out of tools yet, but there was no sign of the need to act again if the U.K. decides to stay.

BOJ Kuroda: “FX, stock markets sometimes move too much” this could easily be interpreted as the BOJ are preparing for intervention. Many analysts assumed USDJPY below 105.00 would trigger this move, no evidence that this is the case so far.   He also empathized that the deflationary mindset was deeply rooted in the Japanese mindset and with a note of irony also said that both fiscal and monetary policy do not always turn out as expected.

Main Macro Events Today

Canada Retail Sales: Retail sales values are expected to rise 0.7% in April (median +0.8%) after the 1.0% drop in March. The report is due Wednesday. The ex-autos sales aggregate is seen expanding 0.6% in April (median same at +0.6%) after dipping 0.3% in March. Gasoline prices increased 8.9% in April after expanding 5.7% in March, according to the CPI . Hence we should see the gasoline station sales component exert a boost to total and ex-autos sales. But vehicle sales remained elevated though April, so we may see another positive performance from the vehicle component. The consumer has been quite resilient in so far in 2016. An as expected gain April retail sales that is accompanied by a rise in the “real” (price adjusted) sales basis would further underpin our expectation for a rebound in April GDP. We expect April GDP to rise 0.1% after the 0.2% drop in March.

 Yellen Testimony:  Fed Chair Yellen’s Monetary Policy Report to Congress continues today as she concludes her testimony.

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