How long with the Risk-ON?

It seems that the low volatility in the FX market in addition to a strong risk sentiment both brought back carry traders’ interests for the past couple of weeks.

If we have a look at the graph below, we can see that the AUDJPY broke it 96.00 resistance to trade at 96.50 on Friday afternoon (up 7% since March 1st at that time), before edging down a bit. At the same time, the equity market (S&P500 – red line) reached a new record high at 1,897.28 and is now trading 40 points lower.

AUDJPY-SP

(Source: Reuters)

Is the risk-on trend going to continue in the coming days?

Firstly, this week started with an agitated session in Asia despite the Shanghai Composite was closed for a market holiday. After it reached a lower March high of 15,164.39 on Friday, the Nikkei index was down 1.7% with USDJPY down 100 pips and finding support slightly above the 103.00 level on Monday UK/US trading sessions.

This morning, the US Dollar remained under pressure against most of the currencies, with the USD index trading back below the 80 level. Although the US March employment report came in line with expectations last Friday (192K vs con. 200K) and February’s job creation was increased 22K to 197K, demand for the greenback is still weak as traders and investors have been guided to look at a ‘wide range’ of variables. As you can see it on the chart, the index managed to find support around 79.75; a level that the market seem to consider as a buying opportunity.

USDX

(Source: Reuters)

Tomorrow, the Fed will release the minutes of the March FOMC meeting (18th-19th) and should give us more details on the ‘qualitative’ guidance.

Euro: The ECB policymakers’ threat of unconventional action didn’t manage to push the Euro to lower levels, and the single currency found support at the high of the support band 1.3640 – 1.3680. EURUSD soared 50 pips this morning and is now trading around 1.3800. It mainly came from a Dollar weakness, which pushed the single currency to the high of the 1.3300 – 1.3800 range as the Dollar index is heavily weighted towards the Euro (57.6%).  

Sterling: After underperforming a bit last week, Cable (Purple bar) surged 100 pips this morning boosted from strong Feb Manufacturing (1.0% MoM vs. 0.3% exp.) and Industrial (0.9% MoM vs. 0.3% exp.) production data. The pair is now trading at 1.6750; the next resistance on the topside stands at 1.6770. The 2-year UK-US yield, one indicator that I like to watch quite a bit (orange line), is up 5 bps since Friday’s low of 0.219%.

CAbrr

(Source: Reuters)

Yen: As expected, the BoJ kept their monetary policy unchanged at the conclusion of its 2-day meeting despite a series of missed indicators (PMI, GDP, Industrial production…). According to BoJ policymakers, the Japanese economy can ‘swallow’ a sales tax hike that started on April 1st without adding more stimulus on the table. As a reminder, the BoJ 2014 Monetary Base Target stands at 270tr Yen (which was decided to be kept steady unanimously overnight) and was double after the central bank introduced its Quantitative Qualitative Monetary Easing (QQME) last year (April 4). However, the policymakers’ decision to increase the monetary base target will depend on the level of the inflation rate which has been constantly rising to higher levels (Overall Nationwide CPI printed at 1.5% in February).

USDJPY is one of the biggest movers, down 2% since Friday high of 104.12. The pair is now trading at 102.20, testing its support band of 102.00 – 102.20. The next support on the downside stands at 101.75.

USDJPY

 (Source: Reuters)

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