Overnight and The Day Ahead 12.05.2016

Good Morning,

After yesterday’s gains is the Kiwi, today it is the poor performance of the Aussie dollar that catches the attention of the market.

Despite some interest at 79.50 in AUD/JPY out of Tokyo, the AUD/USD is down 0.5% on the day and down 4% over the past month.

Last week the RBA cuts rates to 1.75% and they have another 40 bps of cuts priced into the 1-year curve with the next cut fully priced in for November.

Toyota and Bridgestone earnings were disappointing, Nissan announces a tie up with Mitsubishi, Nissan are looking to take a third stake in the company, both boards are meeting. All Asian stocks markets indices are in the red, the risk off environment remains.

 The BOJ Governor Haruhiko Kuroda has had comments published from an interview with German’s Boersen-Zeitung, the headline statement was “Technically we can go as low as the ECB”.  Other comments included it is “Desirable for FX to reflect economic analysis“ and the “Finance Minister is responsible for Japan’s FX Policy.”

The day ahead has ‘Super Thursday’ here in the U.K, finally some data to get our teeth into, actually it will be the speech by Governor Carney that will be of interest. Journalist will be quizzing his ‘Brexit / Bremain’ views. The Manufacturing sector continues to come under scrutiny output is still less than 20 years ago.

In other news Oil had a strong day yesterday up 3.5%, as output has declined to 8.8mio barrels a day the lowest level since September 2014, stockpiles fell 3.4mio barrels.

And finally Chelsea have ended their kit deal with Adidas six years early or have Adidas ended the deal early, who next? Under Armour, Nike, Puma and New balance are all believed to be interested. Google ban pay loans ads.

                                                                                                                (Cons)   (Prev)

09:00     EUR Industrial Production (MoM) (Mar)                                 0.0%      -0.8%

09:00     EUR Industrial Production (YoY) (Mar)                                     1.1%      0.8%

11:00     GBP BoE Asset Purchase Facility (May)                                   £375B    £375B

11:00     GBP BoE Interest Rate Decision (May 12)                               0.5%      0.5%

11:00     GBP Bank of England Quarterly Inflation Report

11:00     GBP BOE MPC Vote Unchanged                                                 9:9

11:00     GBP BOE MPC Vote Cut                                                                 0:0

11:00     GBP BOE MPC Vote Hike                                                               0:0

11:00     GBP Bank of England Minutes Report

11:45     GBP BOE's Governor Carney speech

12:30     USD Initial Jobless Claims (May 6)                                              270K      274K

12:30     USD Continuing Jobless Claims (Apr 29)                                  2.120M 2.121M

12:30     USD Import Price Index (YoY) (Apr)                                                          -6.2%

12:30     USD Export Price Index (MoM) (Apr)                                       0.1%      0.0%

12:30     USD Export Price Index (YoY) (Apr)                                                           -6.1%

12:30     USD Import Price Index (MoM) (Apr)                                       0.5%      0.2%

12:30     CAD New Housing Price Index (YoY) (Mar)                                             1.8%

12:30     CAD New Housing Price Index (MoM) (Mar)                         0.1%      0.2%

14:30     USD EIA Natural Gas Storage change (May 6)                                       68B

15:45     USD Federal Reserve Bank of Boston President Rosengren Speech

17:00     USD 30-Year Bond Auction                                                                           2.596%

17:30     USD Fed's George Speech

Have a great day

Anish S. Lal – VP Sales

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

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Kuroda's Economic Armageddon

Ladies & Gentlemen

All market eyes will be focused  on Japan tomorrow, as they release updated inflation forecasts. Essentially, this is an indicator of when, or if, the bank;s board members see Japan reaching their inflation target of 2% and markets are expecting the BOJ to become even more engaged in search of the 2%. The Markets over the past few weeks have priced in more stimulus, especially with the recent Nikkei gains.

Kuroda has done an excellent job in albeit trying circumstances, elevating inflation expectations in an economy that has had actually 0 inflation in the last 20 years. 

Just cast your mind back to 2 years ago when the USDJPY was trading around 80 and now trading around 120 & Nikkei at 8,000 & now nearly 20,000 - really putting QE into Economic action - essentially reflating the risk/assets base. But still have a lot more positive inflation to go up to 2%.  However, could we really see the BOJ wanting to weaken the Yen further? At the moment Japan is still very cheap & the major corporates have been rubbing their hands in Green for the past few years now - on the flip/side the small/medium companies have been feeling the pinch with greater import costs. In addition, policy markers are also adjusting for (and looking forward to) lower a base of lower oil prices, but again adding more stimulus could be more problematic in the longer term.

In my view, the decision tomorrow is more likely to be felt within the Equity Markets as Kuroda focuses on building a significant amount of more wealth into the Nikkei and their is a high conviction level from traders that something will happen - Especially as Japan owns more than half of the nations ETFs (An important Abenomics Battleground) - But really where does true Economic Theory come into play here? Central Banks buying up ETFs to promote more "risk-taking activity in the Economy"... Overall, Japan has a very important lesson that they have probably been mislearning and it's underlying issues could be 1 of 2 things... either Deflation or is it because they failed to act like the US did in the 90s.

As Buffet once said"We are all Market Vigilantes" So what is the end game for the BOJ? Does AbeNomics fail trying to approach a 2% target that they may not ever hit. We face an absolute Economic Armageddon. In my view, a lot of Japanese pride on the line.

Keep your eyes peeled & fingers on the right side of the trigger!

Best of luck
Anish @ Atom8.com

Could Monetary Policy Divergence cause EURUSD to hit parity by December?

Ladies & Gentlemen, 

We have heard it over and over again & now it is crunch time, where Economic theories come into practice and the Markets click to the tune of the Central Bank Announcements. 

Here is what ING predicted at the start of 2015 and low & behold how the year has turned out to map  the below 

Over the last 12 months the Markets have remained bearish and the EURUSD has fallen from 1.40 to 1.05.. but why?  And the concept is pretty simple to understand, as the FED stop QE at the same time of the ECB continuing their QE policies. This is known in the Markets as a "Divergence in Monetary Policy" and as the Markets price in their expectations of a FED non-hike, the divergence is set to continue... Implicating parity and if not parity, then sub 1.00. 

Vamvakidis, head of G10 Strategy at Bank Of America calls for EURUSD to hit parity by December 15 and also the USDJPY to hit 125. 

What needs to happen for EUR parity? Well, in order for this prediction to hold - the divergence needs to move further. If we get more QE by the ECB in December and the FED does not hike (which is very ikely) we could easily see parity. But the FED hike is a matter of time and could be as early as Jan 2016. The equilibrium of the EURUSD cross is around 1.15, however, the Euro zone still has a significantly large Output Gap compared to the US & if the ECB announces an "open ended" (or Infinity based QE) - that could stir up a recipe for disaster - as the Bears would then look to push down to 0.75. 

How do I trade these markets? Volatility remains high and it is mainly the bears driving the markets, supported by the facts pushed from Central Bank data this month. Looking at the bigger picture, the FED will eventually look to hike rates but more than likely, it will not be until next year - even though Domestic data has improved in the US, I would not expect anything significant this week. Keep your eyes on the data A balance between Domestic Developments & External Developments is key for the FEDs decision & once we do see the hike... the bad news will hit hard & remain bad news! 

Can I Jump on The Karoda Vs Draghi Trade? The international expectation is for more BOJ easing and if you look at the currently inflation rate in Japan, the BOJ should actually be doing more. The USDJPY currently is not that strong, either not that weak. However, it would be ideal to remain long the volatility as no matter what happens USDJPY will move! 

I wish you the best of luck with your Trades & hope you keep your fingers on the right side of your mouse triggers! 

Anish @ Atom8.com