'Improvement in Eurozone economic activity unlikely to offer meaningful support for the euro' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXstreet.com

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

What impact will the consumption tax hike in Japan have on the country's economy in the short and in the long term in your opinion?

From a trading perspective, what matters is the extent to which Japan’s sales tax hike slows the economy and undermines the BOJ’s efforts to combat deflation. If the headwinds from the tax begin generate negative economic news-flow, speculation about a forthcoming expansion of monetary stimulus is likely to put pressure on the Japanese Yen. We won’t know precisely what this looks like for a few months as we monitor incoming data, but the dramatic deterioration in data outcomes relative to expectations since late January certainly sets a worrisome tone.

How well is recovery progressing in the Eurozone in the light of the latest manufacturing PMI results?

While economic activity in the Euro area seems to have been steadily on the mend since late 2012, this is unlikely to offer meaningful support for the Euro. The ECB mandate focuses exclusively on price stability, and the latest CPI figures putting the year-on-year inflation rate at 0.5 percent – a far cry from the central bank’s target of “close to 2 percent” – suggest more monetary stimulus is in the cards. This is likely to weigh against the single currency regardless of the pickup on the activity side of things.

Is the situation in Ukraine heading towards complete de-escalation right now or do you expect tensions to rise again?

While gauging the situation is difficult without being on the ground, the markets’ interest in Ukraine-related developments has notably waned over the past two weeks. That certainly doesn’t mean another flare-up is impossible. However, an active response from price action will probably require that any escalation generates legitimate market disruption risks, such as an interruption of Russian energy export deliveries to Western Europe.

The EUR/USD refuses to fall as the pair is well supported at least for now, following the latest ugly CPI data in the Eurozone, how do you think the ECB will react and consequently the euro?

The ECB mentioned at this week’s policy meeting that they are prepared to introduce additional stimulus. That was to be expected: policymakers are likely waiting for their Asset Quality Review (AQR) to reveal the gap in policy transmission that prevents ultra-low borrowing costs in the interbank market from being passed through into the broader economy. That limits Mario Draghi and company to a rhetorical effort for now, but some form of further easing that weighs on the Euro is likely to emerge in the second half of the year.

It seems the USD/JPY finally started engines with the pair rallying to 103.50; following the Japan fiscal year ending, do you think the USD/JPY will sustain gains or as Goldman Sachs forecasted previous week, the pair will fall to 97.00? 

The critical issue from here is US monetary policy. With the BOJ in wait-and-see mode until the impact of the sales-tax increase can be reasonably evaluated and USD/JPY showing a strong correlation with the US-Japan 10 year bond yield spread, the object of speculation is the likely continuity of the Fed’s QE “tapering” cycle. US economic news-flow is showing signs of stabilization relative to expectations having noticeably deteriorated since mid-January. That seems likely to erode concerns about a pause or slowing in the process of reducing monthly asset purchases, hinting the trend in USD/JPY probably favors the upside.