*** Currency Market Analsis 10-04-2013 ***

[The Machine]

Overnight Chinese trade data showed that imports of key commodities rebounded in March, signaling that domestic demand could be picking up in the world’s second largest economy. Asian equity markets went bid, with the Nikkei closing at a four-and-a-half- year high at 13,288.10. European equities are also having a positive session, with the STOXX50 currently up 1.3%, and in North America all major equity futures contracts are pointing to a positive open after the Dow printed fresh all-time highs yesterday.

 

The CAD is little changed after yesterday’s close around 1.0160, while the AUD and NZD continue to punch in impressive gains, with the AUD up 0.40% and the NZD up 0.25% overnight. Gold seems to be behaving itself, even in the face of all of the fresh central bank stimulus, as it fell to a low of $1576.00 an ounce in the spot market overnight.

 

The Fed will take back the spotlight today when it releases the minutes from its latest Federal Open Market Committee (FOMC) meeting at 2 p.m. EST. Look for currencies to trade sideways until then.

 

FOMC Minutes

 

The minutes from the FOMC meeting will be released this afternoon and markets will be paying close attention to the discussion revolving around the adjustment of purchases relative to the changing market outlook.
The Fed has been embarking on a transparency drive with the market, as Bernanke believes providing inflation outlooks, rate hike guidance, and linking of purchases contingently to the unemployment rate will better help steer market expectations. Today, traders are hoping the Fed will outline guidance on what exactly will cause them to taper or alter the rate of purchases in relation to a brightening outlook.

 

With the poor non-farms employment report of last week, cold water has been thrown on the idea of the Fed mulling a discontinuation of QE3. The median estimate is that the Fed will continue its program until September, at which point it will stop purchases but still keep monetary policy ultra-accommodative.

 

If there is any mention in the minutes that this guidance could be pulled forward or that improving labor conditions could cause them to adjust, the USD should go bid. As stated before, the new relationship over the last couple of months is that the USD tends to goes bid on positive US data, so any mention of USD money supply not increasing at an aggressive pace will surely bring the dollar bulls out to play.

 

The Yen is on Sale

 

Yen sellers refuse to back down even after the seven big figure move we witnessed since the Bank of Japan’s (BOJ’s) major announcement of monetary easing. The BoJ will buy around $80 billion USD worth of assets every month, or about 1.4% of Japan’s gross domestic product (GDP). The nominal figure is just shy of the Federal Reserve’s current plan of $85 billion a month, but Japan’s economy is half the size of the US which is the reason markets are in frenzy.

 

In early trading yesterday, USDJPY looked poised for a quick pull-back as sellers of USDJPY shot the pair from 99 down to 98.5 in a matter of seconds. It was the set-up for a classic short squeeze, but instead real money accounts and leveraged sellers took the opportunity to initiate fresh shorts even as we sit at five-year highs. The Yen is now at a three-year low versus the euro this morning, around 130 and overnight comments by Kuroda stating that by his estimates the bond buying program will run at least two years has the currency continuing to be offered.

 

The global search for yield is on and a massive injection of fresh yen liquidity has high beta currencies flying. The ZAR has gained 4.4% since the announcement, crashing through a significant and well-established USD bullish trend line at 9.00. The Mexican peso has seen significant inflows as the currency has strengthened 2.5% percent, while Mexican government bonds have been equally as strong. The Aussie is eyeing fresh three-month highs, while the Kiwi unit sits around 0.8550—a level not seen since the currency hit an all-time high in 2011.

 

With the BoJ’s printing press running as fast as it can, there is good reason to believe these currencies will be well-supported for the coming year, making dips shallower and buying opportunities less obvious.