Yesterday, FTAlphaville passed on “permabear” Albert Edwards’ comments that China is intent on devaluing its currency as the only way out of its deflationary predicament, which will impose a deflationary impulse on the rest of the world. “The continuing deterioration in Chinese economic data significantly increases the odds of global deflation being unleashed via an unavoidable Chinese devaluation”. There is certainly evidence of this in the latest moves in the yuan, which continues to weaken well beyond the 6.20 level that would have been sufficient, as the general story went some weeks ago, to “teach the USDCNY carry traders a lesson” as the Chinese government sought to eliminate the idea that CNY strengthening was a one-way street. Continue to watch the USDCNY level (and its easily tradable offshore USDCNH counterpart) for evidence that Edwards’ view is proving correct. This will create an interesting set of tensions with the rest of the world, not only with Japan, where the relationship is already extremely frosty, but also with the US.
Yesterday saw an odd combination of European Central Bank (ECB) developments. First, the EURUSD traded lower after bank chief Mario Draghi talked up the potential for ECB action and stated in clear terms that the exchange rate was becoming increasingly important in policy considerations. He also clearly indicated that meeting minutes will soon be issued for ECB meetings. Later in the day, the MNI news wire was out with a story quoting ECB sources that no plan of action has been decided for the May meeting and that there is no unanimity on any specific policy tool. This kind of story takes the edge out of the Draghi’s recent rhetoric and the basic problem that we have only seen talk and no action. Thus – the EURUSD chart remains a two-way threat until we get firmer signs of either stronger US data and/or stronger potential for ECB policy action.
The spike in Tokyo’s inflation data in April reflects the introduction of the new VAT rate, and actually looks less inflationary than one might expect, as the headline 2.7 percent rate was less than the 3 percent hike in the tax. This could reflect an unwillingness by retailers and others to immediately hike prices by the full amount and we’ll need to see a few more months of data. The nation-wide Japan CPI data for March was in line with expectations, with the core inflation level effectively flat since the December reading.
Looking ahead
Hardly anything of note on the economic calendar today, with UK Retail Sales the sole point of interest in the European morning and likely to push GBP crosses around in the near term.
Chart: GBPUSD
GBPUSD in focus today with the latest Retail Sales report. Note that while the rally in cable has been persistent, every episode of new highs has been followed by extensive back-fill. Even if we get a strong report today, I suspect the potential for new highs is limited in scope and will be followed by one of these back-fill episodes. I am also looking for a cycle top soon, with the timing correlating with the timing of the top in market complacency (meaning unsure – next few days or couple of weeks or not for another month or two? I would lean on two weeks or less as the highest probability scenario.).
Next week is FOMC week (Federal Open Market Committee meeting), but it doesn’t feel like market anticipation for this event is building as the US data has improved somewhat, but not sufficiently to heighten anticipation of any new rhetorical twists of interest from Janet Yellen and company. The June 2015 Fed Funds Rate future has backed off the highs that were posted the week after the market was disappointed by the March US jobs report, but are now only pricing in about 5 more basis points of rate anticipation relative to the lows in anticipation. And it seems it will take World War IV or a plus-400k jobs report next week to alter the view that the Yellen Fed will do anything besides taper purchases USD 10 billion per meeting.
The day after next Wednesday’s FOMC announcement, we have the latest PCE inflation data and then the string of key US data gets under way over the next three trading days, including the ISM Manufacturing on Thursday and then the Employment Report on Friday, followed by the ISM non-manufacturing the next Monday. Hopefully, therefore, next week provides sufficiently interesting developments to break us out of the glacial trading environment that is seeing EURUSD trading ranges within a few pips of all-time lows. USDJPY implied volatilities have collapsed as well, with the 3-month measure in freefall to close to 7 percent - the lowest since early October of 2012, just before the market started anticipating the potential from Abenomics.
Stay careful out there – all of the quiet is the market storing up for the next big move.
Economic Data Highlights
- Japan Mar. National CPI out at +1.6% YoY as expected and vs. +1.5% in Feb.
- Japan Mar. National CPI ex Fresh Food and Energy out at +0.7% YoY as expected and vs. +0.8% in Feb.
- UK Mar. Retail Sales (0830)
- UK Mar. BBA Loans for House Purchase (0830)
- US Apr. Preliminary Markit Composite/Services PMI (1345)
- US Apr. Final University of Michigan Confidence Survey (1355)
- Euro Zone ECB’s Knot to Speak (1430)
- Switzerland SNB’s Jordan, Studer to Speak (1630)
- Japan Mar. Retail Trade (Sun 2350)