Pivotal levels for USDJPY approaching again with BoJ up tonight and as we head toward financial year-end in Japan.
We're not sure what the rise in the German and EuroZone ZEW surveys is all about except to wonder if it is a "things are so bad, they simply can't get any worse, so the future is bound to look up" kind of rally. There's another word for that: hope. And it appears that is about all that market participants can bank on in this environment considering the negative reinforcement from all sides in the economic news and ugly, undealt with issues still hanging over the markets. Perhaps there is reason to hope that the pace of the deceleration slows from its furious rate over the last few months, but weakening declines are a far cry from outright growth, and the still very negative current situation part of the ZEW shows that investors still consider the situation historically bleak.
Certainly, the action in the equity markets looks like a hope-based rally at best and we wonder how much further it has to run here. Dabbling in a little tech analysis of the benchmark S&P500 future due to equity market's tremendous influence on the broader intermarket moves, we judge that 768 was a key tech resistance level (slightly breached yesterday before a strongish reversal) followed by the structurally key resistance at 800. We note again the risk of a return to risk aversion on any FOMC/US Treasury announcement this week as the market seems consistently to express revulsion every time the public sector mounts a new effort to deal with the ongoing financial and economic turbulence (like Peggy Noonan said in a WSJ article over the weekend: we need to come up for a name for this thing).
Most currencies continue to trade in ranges ahead of the FOMC announcement tomorrow evening. It seems that any pair that has breached a key level has then shied away from a bigger directional move and then retraced its steps. USDCAD fell through some key support areas around 1.2670 recently, but is now popping back higher into the range. AUDUSD had a poke at the key 55-day moving average but has found no momentum through there just yet. EURUSD zipped up through 1.3000, but the new highs yesterday were once again beaten back as that pair has taken a 3 steps forward, 2 steps back approach lately and is now flip-flopping around 1.3000. USDJPY is the latest attention grabber with its move to a 4-day high in today's trade. Is the pair going to have a poke at 100.00 and then decide to turn tail as well? The US yield curve will likely provide the best answer to that question if past patterns of behaviour continue to hold true. And as we have hammered on this week, the 3% area on the US 10-year notes looks very important for bond markets. Also watch out for the BoJ tonight for possible hints of further non-traditional monetary policy announcements.
An FT article out overnight ("Markets watch for next Fed move") offers excellent analysis on the FOMC meeting tomorrow and why the Fed may be waffling on whether to immediately follow the BoE's lead on debt monetization. The arguments against a move suggest that the Fed is mostly focused on bringing relief to private borrowing for now. And with the TALF effort aimed at consumer credit launching in the days ahead, the FOMC's monetary policy statement may focus mostly on its hopes that this program will prove a success. The arguments for debt monetization include the fear that the TALF effort will be too slow to benefit the economy. Regardless, any twist of rhetoric related to the degree to which debt monetization is on the table could be a spark for plenty of volatility. We'll run through a couple of scenarios on potential FOMC outcomes tomorrow.
As we are about to go to press, the US economic data is rolling in and shows the core PPI stubbornly elevated and very strong US Housing Starts and building permits number. We can't help but wonder if the surge in housing starts from February (still far worse than numbers for last November even) is due to weather factors, though the housing market has to move into a bottoming out process in coming months. One of the better leading indicators in the US housing market is the NAHB survey, which seems to lead the other indicators, and the March data point for this survey was just out yesterday and is still pegged all the way at 9, matching the Feb. level and a single notch above the January record low of 8.
Chart: USDJPY
Once again, we have a look at the USDJPY chart: which is nearing seasonal (Japanese financial year-end) and technical pivots as we are also looking for possible pivots in US government bonds due to the FOMC event risk this week (not to mention BoJ tonight and the G20 summit up in less than two weeks now). The 100 level is key as a psychological level and is also very close to the 200-day moving average.
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