Market Recap

Since I was travelling yesterday morning I didn’t have a chance to run my spreadsheet. Hence the graph this morning shows the change in the trade-weighted indices from Monday morning in Asia. However, given that Monday was a holiday in most European centers, the bulk of the changes occurred Tuesday in any event.

As for the biggest mover, AUD, it did lose some ground on Tuesday but the big plunge came this morning in Asia, when the Q1 consumer price index (CPI) came out showing inflation much lower than expected. No matter how it’s measured, Australia’s CPI is well below the Reserve Bank of Australia (RBA)’s 2%-3% target range.

As a result, the market has totally repriced the odds of a near-term rate cut. Monday, investors thought there was a 50-50 chance of a rate cut by August; now they see a 58% chance of a cut at the next RBA meeting (May 7th).

Given the large decline over the last 24 hours, I could see AUD bouncing back later today just on profit-taking, but I think in general it’s likely to be weak for some time. According to the Commitments of Traders (CoT) report, speculators have been closing out their short AUD positions over the last two weeks and in any case, they are still not as short as they were several months ago. And the Citi “FX pain” positioning index, which infers positioning of active currency traders from relationships between exchange rates and currency managers' returns, suggests that currency managers are actually long AUD. That means there are plenty of sellers of AUD left in the market.

Elsewhere, CAD weakened steadily during the day yesterday. Even a better-than-expected figure for wholesale trade sales (+0.3% mom vs +0.1% expected) failed to boost the currency, perhaps since the previous month was revised down to +0.4% from +0.6%. I think this performance indicates a negative market view on CAD ahead of today’s Bank of Canada meeting, which only strengthens my conviction that the meeting could prove negative for the currency (see below).

 

Today’s market

There are two central bank meetings today, but only one of them is really worth watching.

Just six months ago, the market was totally convinced that the Bank of Canada was going to hike rates this year – it was seen as a 98% probability (red line), with a 90% probability of two hikes. Now there’s almost zero probability of even one hike, and around an 84% probability of no change in rates at all this year (purple line).

But while no one expects any change in rates at today’s meeting – or any time this year for that matter -- there could be a change in nuance or bias.

At their last meeting, the BoC turned decidedly dovish. They said that “the slowdown in the global economy has been more pronounced and widespread” than they had forecast and that “the slowdown in the fourth quarter was sharper and more broadly based” than expected. “It now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January,” they said, while also dropping any reference to a recovery to above-potential growth in 2020. “Governing Council judges that the outlook continues to warrant a policy interest rate that is below its neutral range,” they said, adding that “With increased uncertainty about the timing of future rate increases, Governing Council will be watching closely developments in household spending, oil markets, and global trade policy.”

Now things look a bit different. With the bounce in China, the slowdown in the global economy may not be as “pronounced and widespread” as they had feared (although the disappointing preliminary PMIs out last week show that the bounce isn’t as pronounced and widespread as I had hoped, either). Canada’s retail sales have started to turn up, Canadian oil prices are up 19%, and an end to the US-China trade bickering seems in store (although US-Japan and US-EU bickering continues). So the picture may be a bit brighter than when they last met. They could come out with a somewhat less pessimistic outlook, in which case we could see CAD gaining after the meeting.

As for the Bank of Japan (BoJ) meeting overnight, it’s pretty hopeless. BoJ Gov. Kuroda came into office in April 2013 vowing to get inflation back above 2%. According to Reuters, the BoJ meeting’s forecast update will show inflation remaining below its 2% target through the fiscal year ending in March 2022.

In fact, they’ve apparently given up. Just recently a former Bank of Japan official in charge of monetary policy admitted that the country’s 2% inflation goal is more of a symbolic target than anything else. According to Bloomberg News, he said that provided the economy continues growing, hitting the inflation target no longer matters to the government. Instead, the measure of success will be an improved economy, wage and employment growth. Nonetheless the BoJ can’t abandon the target, because giving up on its easing commitment could trigger a sharp rise in the yen and a fall in stocks. So with no hope of hitting the target and no chance of abandoning it, the meeting is likely to be yet another pro-forma affair that results in no market-affecting change in the stance.

As you can see, the trading range on BoJ days is generally lower than on other days, probably because people hold off trading in anticipation of some change in policy but then find no incentive to get back in after yet another anodyne comment.

Aside from the two central bank meetings, Germany’s Ifo indices are coming out. While the current assessment is expected to be a bit lower, the expectations index is forecast to be substantially higher. That could provide some relief after the disappointing German manufacturing PMI last week and could help to boost the euro.

 

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Marshall Gittler

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