The currency markets are mostly dominated by profit taking and speculative positioning as the investors seek direction these days. The Wall Street rally gave a short-lived boost to risk-positive currencies in New York, yet the limited enthusiasm in Asia lead to some consolidation during the overnight session. AUD and NZD were the biggest winners overnight as we suspect that carry trading is now subject to demand, regarding the bearish outlook on JPY weakening.
GBP saw heavy unwind this morning, in the back of weak industrial and manufacturing data. Cable dropped to 1.4832 – a new fresh low, lowest since June 2010.
Weak, weaker, weakest?
As the JPY bearish trend strengthens, the credibility on Abenomics and the further negative outlook for broadening Yen weakness gain momentum. Now, the Japanese media reports that the BoJ Board might have an emergency meeting immediately after the three nominees to new governorship are approved by the Japan’s Diet this week. The Deputy Governor nominee Iwata is focusing on aggressive monetary easing to ensure the positive trend in Yen weakness.
JPY and its crosses traded one leg up in Tokyo yesterday. USDJPY hit 96.71, while the biggest winners were AUDJPY and NZDJPY. Overnight, AUDJPY traded over 99.50, and the markets now target 100.00, while NZDJPY hit 79.90 – its highest quote since July 2008. The carry traders are believed to jump in the game as the current market conditions are favorable to chase decent opportunities. First, the volatility on AUD and NZD vs. JPY is on a weakening trend; the 1-month implied volatility shows lower lows and lower highs. Second, the CFTC data shows that the recent speculative positions retreated, especially on AUDJPY, where the speculative volumes collapsed 90% since December 2012. Consequently, we suspect the long positions to be rebuilt on the bullish outlook on AUDJPY, decently relying on BoJ policymakers naturally.
The monthly Sharp ratios on carry trades with JPY funding leg were negatively impacted by the recent high volatility since the JPY started its massive weakening (appr. 6 months ago). Now that the volatility is looking downwards, we expect more opportunities to jump in the trend in the close future.
Smash on GBP
GBP registered a heavy sell-off immediately as the industrial and manufacturing production numbers fell in this morning. In January, UK’s industrial production decreased by 1.2% month-on-month (vs. +0.1% exp. and 1.1% in December), pulling the yearly drop down to 2.9%, while the manufacturing production retreated by 1.5% m/m and 3.0% y/y. As immediate reaction, GBPUSD sold-off 80pips in single move, while EURGBP soared to 0.87775.
The future outlook remains cloudy over the sterling as the bearish trend momentum strengthens. We remain bearish on GBP, and place our next target to 1.4687.
Fake Rally on Euro
Yesterday saw decent Euro bids taking the currency pair up to 1.3054 in NY. In fact, the risk rally in Wall Street triggered a short-lived positive momentum on the risk-positive currencies versus USD and JPY. But that’s it. The reason has obviously not been enough to keep EURUSD over 1.3050, and the pair wrote-off US session gains entirely, and traded down to 1.2990/1.3000.
Data-wise, the German CPI numbers came in line with the market expectations in February, while the Greek industrial production fell by 4.8% in January (vs. -0.5% in December). The 10-year sovereign yield spread between core and periphery keeps widening on the political instability and the economic discrepancies within the Euro-Zone. So far, EURUSD built a strong resistance on 1.2960 / 1.3000 zone in March. The bearish trend remains strong, as we keep our bearish view on EURUSD. In our view, the current support should soon fail to carry such an heavy EURUSD on its shoulders.