Euro and Cable sell off on speeches from German and Canadian officials
Last week, when German and Canadian officials adopted the same strategies in the European Central Bank (ECB) press conference and Bank of England (BoE) meeting, in order to protect the U.S.-lead bond market, they had to be dovish although recent data in Europe pointed upward. They might smell the "195k" after the Automatic Data Processing (ADP) payroll data.
The ECB gave clues that the interest rate and deposit rate could stay low or at its current level for a "prolonged period," despite no guidance from Mario Draghi on details of the prolonged period. Technically speaking, Draghi FOULED again, not the Canadian. A few months ago, he used the "data pledge" as the benchmark of policy guidance. If so, he should be slightly "hawkish" or no longer "further dovish." Despite Mark Carney and Glenn Stevens taking advantage of the Fed's policy, they do have their difficulties since the R-word is on the table now. However, it's a hidden foul as referees could buy the story as the yield of Portugal debts surged last week. So, what a genius foul!
On the BoE side, Carney signaled that the bank would keep rates low longer than earlier consensus, by using the first meeting to establish his upcoming monetary policies, such as Bank of Japan's (BoJ) Haruhiko Kuroda. The implied rise in the expected future path of the bank rate was not warranted by recent developments in the UK economy, despite leaving the rate and amount of bond purchasing unchanged. Moving forward, the BoE could observe bond yields and volatiles closely to adjust its monetary policy, given recent increasing borrowing costs and volatilities dampening the economy. Compared to the BoJ, BoE's task could be much easier to handle the bond market since they have not set an inflation target yet, which means less confusion for the central bank to conduct open market operations (OMO).
However, like the ECB, the BoE did intend to defend its bond market since the U.S. Quantitative Easing (QE) tapering seems to look more real recently.
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Do we still trust in USDJPY?
There is nothing much the BoJ can do in upcoming months, besides that we may continue seeing economic data improvement. The risk factor will be mainly from the U.S. Macro condition.
It might be still early for the Fed to start showing attitude of walking out of the zero interest-rate policy (ZIRP) environment after the two upcoming Non-Farm Payrolls (NFP). However, they do stand a chance to tweak something at the end of the year.
Meanwhile, Abe Kuroda takes a free ride. Given the higher possibility for Kuroda to add "put" features on the USDJPY, despite no official statement saying so, the force of selling off may decelerate even if the U.S. economy goes opposite of momentum now.
Having said that, I remain with a patient view in the USDJPY trade, as the Fed might not be as optimistic as the street, once economic data fades and risk premia comes.
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