EURJPY likely a big mover over next five trading days on end of Japan financial year, G20 and ECB all in the pipeline for next week.

MAJOR HEADLINES – PREVIOUS SESSION

  • New Zealand Q4 GDP out at -0.9% QoQ vs. -1.1% expected

  • New Zealand Feb. Trade Balance out at +489M vs. +75M expected

  • Japan Mar. Tokyo CPI out at +0.2% YoY and -0.4% ex Food and Energy vs. +0.3%/-0.3% expected

  • Japan Feb. National CPI out at -0.1% YoY and -0.1% ex Food and Energy vs. -0.1%/-0.2% expected

  • Japan Feb. Large Retailers' Sales out at -8.2% YoY vs. -6.5% expected

  • Japan Feb. Retail Trade out at -5.8% YoY vs. -3.0% expected

  • China Feb. Industrial Profits fell -37.3% YoY vs. +4.9% in Jan.

  • Germany Jan. Import Index fell -5.4% YoY vs. -6.3% expected

  • Sweden Feb. Retail Sales fell -0.6% MoM vs. -0.3% expected

  • EuroZone Jan. Industrial New Orders fell -34.1% YoY vs. -28.4% expected

  • Switzerland KOF Swiss Leading Indicator out at -1.79 vs. -1.55 expected

  • US Feb. Personal Income fell -0.2% MoM vs. -0.1% expected

  • US Feb. Personal Spending rose 0.2% MoM as expected

  • US Feb. PCE Core rose 1.8% YoY vs. 1.6% expected

  • Germany Mar. CPI out at -0.1% MoM vs. +0.1% expected


THEMES TO WATCH – UPCOMING SESSION

  • US Mar. Final University of Michigan Confidence (1400)

  • UK Mar. Hometrack Housing Survey (Sun 2301)

  • Japan Feb. Industrial Production (Sun 2350)

  • Australia Feb. HIA New Home Sales (Mon 0000)


Market Comment:

A "senior Japanese official" rejected the Chinese notion of a global currency and said that the G20 was not likely to discuss currency issues at the G20, instead focusing on demand, regulatory reform of financial markets and protectionism. All of this was according to a wire report from Reuters. The reaction to this news was quick and brutal in the market, which was not at all positioned for it, having built up significant short USD and JPY positions over the last week after the Fed's super-expansive monetary policy statement. It also was a resounding follow up to Geithner's later comments that he thought that the USD would remain the world's dominant reserve currency. The Telegraph's Evans-Pritchard points out the supposed basket weighting of IMF SDR's if they were to go into effect and the degree to which the dollar would have to weaken for the current world reserve mix to match these levels and this shows why it is important for any USD strength to keep the SDR issue off the table for now.

As the competitive devaluation theme tries to find fuel for a further rally in the EUR vs. the USD and JPY, it quickly runs into the realization that the ECB is slowly being forced down the QE path as well and next Thursday's ECB is beginning to look like a key one for further evidence of such. EURJPY would be a big loser on this - as it looks like EURJPY has seen a big overshoot to the upside considering we're all the way back down to the 130.00 level from recent highs above 134.50. Today's action may be also about front-running an expected end of year reversal in the JPY crosses. As well, if the market begins to switch its focus more on the real risks of deflation rather than competitive devaluation theme, then this could give a significant boost to the JPY.

Some justification for anti-deflationary measures the Fed has enacted can be found in news tidbits dribbling in from all directions about staff and pay cuts. There is considerable consensus about the eventual inflationary effects of current monetary profligacy, but the current picture looks anything but inflationary.  For inflation to really kick in, workers need to be suddenly finding themselves with more an more money to spend, but that is simply not the case at the moment unless you happened to be on the other side of an AIG bet on CDS prices. US unemployment and underemployment is rocketing to new generational highs and workers in a wide range of industries, from automotive and publishing industries to Microsoft temps and Newark, New Jersey public library employees are facing significant cuts to pay and/or health benefits. Deflationary pressures are very real in the present tense. Note the negative US personal income reading for February and downward adjustment for March to 0.2% from 0.4%. This marks the 4th time in 5 months that personal income has fallen into negative territory - the first time since 1953. This is not inflationary news.

Geithner was out yesterday promising a new massive overhaul of the US regulatory framework, something that everyone has long discussed and that will mean regulation of the shadow economy that got us into this mess. Few specifics were given, but we will need to follow these efforts in the coming months and years, as policy will have a tremendous effect on markets in the coming cycle of events.

The kiwi got a big boost on a very good Trade Balance number showing a massive upside surprise in the surplus and the largest surplus number in years for a single month. The trade numbers from New Zealand are very seasonal and the country overall runs a large deficit, but things are moving in the right direction for the currency if it can keep this kind of development up, and especially if food prices rebound strongly in coming months. The back certainly appears broken on the old AUDNZD bull market as we have now crossed down through the 200-day moving average there.

Chart: EURJPY

After a persistent 2000+ pip rally, the stuffing was knocked out of EURJPY today with a challenge all the way through the 130.00 level. As noted in today's headline, we face a significant series of event risks for both currencies and this could be a pivot point for the pair, where the upside may be capped for the cycle. The next focus may be the 21-day moving average around 127.50.

forex chart