Second Day of Quiet in FX But Volatility Looms Ahead

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Market Drivers for April 22 2014

AU LEI bit better, AU government unhappy with RBA neutral bias

Nikkei drop pulls USD/JPY back to 102.50

Nikkei -0.85% Europe 0.51%

Oil $104/bbl

Gold $1289/oz.

Europe and Asia:

AU LEI 0.3% vs. 0.2%

North America:

USD Existing Home Sales 10:00 AM

Currency trading remained very quiet for the second day in a row as many dealing centers were just coming back from Easter holiday and economic calendars across the G-20 were essentially barren.

In Asia USD/JPY once again failed to clear the 102.70 level and the pair sold off back to 102.50 on the back of a last hour decline in the Nikkei. The Nikkei dropped -0.85% as profit taking kicked in amidst a very quiet Japanese economic calendar.

USD/JPY has managed to record 7 consecutive days of gains since bottoming out at 101.37, but its total rally during that time has amounted to just a little more than 100 point as progress has been exceedingly slow. The pair continues to tightly correlate with the price action in the Nikkei and with US 10 year rate and currency investors are waiting for further evidence of US economic growth before lifting the pair over the key 103.00 figure. Today, the US calendar carries only Existing Homes Sales figures which are expected to print slightly lower than the month prior.

Meanwhile there was some rumblings from the Abbott government in Australia regarding the neutral monetary stance of the RBA. According to the Australian Financial Review, government officials are unhappy with RBA de facto move towards tightening which has resulted in the strengthening of the Aussie, causing difficulties for the Federal budget. The fiscal officials are concerned that any further gains by the AUD/USD will prove to be a drag on the economy, but so far Australian demand has remained surprisingly robust, despite a more restrictive monetary policy.

Tonight, the market will get a glimpse of AU CPI data as well as the flash reading of the HSBC Chinese Manufacturing PMI. The inflation numbers are expected to decline on a trimmed mean basis and Chinese data is projected to show no improvement. If the numbers come in soft, the pair could test the 9300 figure and with the clear displeasure of the Abbott government at their back, aggressive shorts may seek to push the pair lower to see if this can be the start of a deeper correction.

In Europe trading was lackluster as well with EUR/USD hugging the 1.3800 line for the second day in a row. Markets will likely remain moribund until tomorrow’s flash PMI readings for April which are setting up to become the key event risk for the market this week. Markets are looking for a slight improvement from the month prior and if the data does tick up, it will remove much of the pressure on the ECB to act.

The euro has remained remarkably well bid despite the lackluster economic growth in the region and the threat of an expanding geopolitical threat with Ukraine. Much of the reason for its resilience lies in the fact that the markets remain highly skeptical of any ECB easing action. If tomorrow’s data serves to only reinforce those doubts, the EUR/USD could mount another run at the 1.3900 level as short covering kicks in earnest.

Boris Schlossberg
Managing Director

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