Japan trade balance improves, Nikkei and Shanghai indices rally

Forex News and Events

Risk appetite surged back in Asian trading. A majority of Asian markets were able to ignore mounting Greek concerns and weak US session to end the session higher. The Shanghai composite rose to 4,384.02 up 2.10% on the back expectations for additional PBoC easing and large volume of retail demand. We remain bullish on China, based not on economic fundamentals, but on the positive effect of stimulus and the new found appreciation of the middle class for share trading. The Nikkei rose above 20,000 up 1.13% (new multi-year high) as Japan reported a better than expected March trade surplus and improved corporate earnings. The unadjusted trade surplus came in at ¥229bn, the first surplus since 2012. Exports surged 8.5% y/y while imports fell -14.5% in March following a -3.6% drop in the previous month. The positive surprise was due to strong exports for autos and electronics, while the cheaper oil price pushed the cost of imports lower. This is a positive sign for the Japanese economy, which has been sluggish since the start of the year. Despite conflicting reports, we believe that the weak JPY is clearly supporting export demand. The Abenomics experiment in competitive devaluations is showing some positive results, particularly in rejuvenating growth. We are not sure that the trade surplus will quickly disappear. Demand for Japanese goods should continue as Europe and China recover (and the US economic soft patch passes). Yet, as long as oil prices remain subdued (which we expect) costly imports will be less appealing then domestic goods. Hence slowing import growth even as the domestic recovery drives demand. Interestingly, with economic bright spots appearing due to the Japanese QE program, we would expected regional players (such as South Korea) to emulate with similar currency debasing activities (but let’s remain PC and not say Currency War). USDJPY was unresponsive to the rise in the Nikkei. We anticipate a bullish break of 120.05 will trigger a quick move to 120.90.

In Australia, the much anticipated weak inflation report went in the opposite direction. The Q1 headline CPI increased 0.20% q/q (unchanged from prior month) against 0.10% expected, yet annual inflation slowed to 1.3% in line with consensus. AUDUSD surged to 0.7774 from 0.7710 and remains well bid. Traders will be focused on 0.7850 resistance to extended bullish momentum to 0.7940, support can be located at 0.7768 65d MA. Despite the unexpected stability in inflation, we still anticipate the RBA to cut OCR 25bp in May. RBA Governor’s dovish comments indicating that rate hikes remain on the table will not be altered due to a slight uptick. While the strong headwinds from slowing China’s commodity demand, clouds Australia growth outlook.

It will be another quiet day on the economic calendar. Euro area consumer confidence is expected to rise from -3.7 points to -2.5 in April. This follows yesterdays mixed German ZEW survey that showed current situation rising while future expectations dropped. In Greece, funding risk are increasing and 5yr yields are inching up toward 20% handle. Negotiations between Brussels and Athens remain tense, with a deal ahead of the Eurozone finance minister meeting on April 24th unlikely. There are further rumors that the Greek officials will meet with Gazprom to discuss a possible pipeline deal to bring Russian gas to Europe through Greece. We believe the risk of a Greek default is significantly elevated with markets only partially pricing the event in. We remain bearish on the Euro and see any EURUSD rally towards 1.0900 as an opportunity to reload longs. In the UK, we expect the BoE MPC minutes to show no change in the voting configuration with all nine member voting to keep policy unchanged. We are bearish ahead of the UK elections with 1.5048 65d MA capping any further upside move. Finally, US existing home sales is expected to rise 3.1% m/m to 5.03m houses sold. Investors are watching all US data for any signs of further deterioration and indications into the timing of the first Fed hike. USD will continued to consolidate as US yields are unchanged.