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Bank of Japan holds ahead of European GDP
00:00, 14 February 2013
This morning’s decision by the Bank of Japan to refrain from further stimulus shouldn’t really have been too much of a surprise given the noises about currency manipulation being bandied about fairly liberally this week, even if the tone of the messages was slightly ambiguous. With the G20 meeting in Moscow set to get under way the Japanese authorities were always likely to play it low key, especially given all the remarks about them being in the spotlight this weekend, however the 0.4% annualised contraction in Q4 GDP pretty much sums up the reasoning behind the recent actions by Japanese policymakers, and in some ways justifies the recent attempts to weaken their currency. In any case while global leaders worry about the rapid yen depreciation as the new Japanese government strives to pull the economy out of its deflationary funk, politicians in Europe are struggling with an altogether different problem, namely that of an appreciating currency. The recent strength in the single currency has prompted calls from some weaker European countries that the euro is too strong at a time when their economies are at their most vulnerable. France, which is starting to show some alarming signs of weakness in its latest economic data, has been one of the most vocal in expressing its concern at the recent rise in the single currency with both President Hollande and his finance minister articulating their concerns. Unfortunately for the French, if the chatter coming out of the G7 is to be believed it is they who are isolated on this, which does seem rather surprising given that Italy’s economy is struggling, even more so. Today’s preliminary Q4 GDP numbers from Europe are expected to highlight the extent of the economic contractions in the last quarter of 2012 with the economies of Italy, France, Holland and Germany all expected to show contractions of 0.6%, 0.2%, 0.3% and 0.5% respectively. The broader Eurozone measure is expected to show a contraction of 0.4%, and 0.7% year on year. All of this with an average EUR/USD exchange rate of 1.29 in Q4. While some of the PMI’s across Europe are showing signs of improvement, which some analysts have used as evidence of a recovery, they still remain woefully weak, Germany aside. Unemployment continues to rise across the weaker economies and retail sales and consumer spending continues to fall. There is also the concern that the French economy is starting to diverge away from Germany’s at a time when the euro looks set to rise further. So far the average rate for EUR/USD in Q1 is 1.3275 a fact that doesn’t appear to have escaped the attention of ECB President Draghi or the ECB in general, who appear to be trying to verbally cap its advances. His comments last week that the exchange rate is important for growth and price stability were a coded warning that the ECB could act if the currency were to appreciate too much. Today’s latest ECB monthly report is likely to bear out the gloomy outlook outlined by Draghi at last week’s press conference. In the US the only data of note is the latest weekly jobless claims which are set to slip back to 360k from 366k. EURUSD – yesterday’s push through 1.3490 peaked at 1.3520, just below the 200 week MA before dropping sharply lower again. A weekly close back above 1.3530 suggests a retest of the 1.3710 highs and as such the bias remains for a move towards the January lows at 1.3250, given last week’s bearish weekly candle. The long term trend line support at 1.3165 from the 1.2045 lows is the major line in the sand for this uptrend. GBPUSD – squeezing back to 1.5690 the cable then dropped sharply, closing below 1.5600 yesterday and opening up a move towards the 1.5270 June 2012 lows. The first support level should come in around the 1.5480 area, while we would need to see a pullback above 1.5700 to stabilise in the short term. EURGBP – sterling weakness remains the order of the day, almost reversing all of last week’s gains, however while below the 0.8700 level the risks remain for a move back towards the lows of this week at 0.8460. For this to happen we need to get back below 0.8580 to retarget a move lower; otherwise we remain at risk for a potential return towards the highs at 0.8715, and probably beyond. USDJPY – the US dollar has slowly managed to pull back ground after the sell off to 92.80 yesterday. While below the 94.00 area the risk remains for a sell-off towards the 92.00 area. With all the talk of G20 and BOJ later this week it will take something tangible to push the US dollar above the 2010 highs at 95.00. Only below the 90.30 level argues for a deeper correction towards key support at 87.50.