Two for Tuesday: Asian central banks, European inflation
There have been two central bank actions in Asia to note. In Europe, two countries reported lower than expected inflation.
China unexpectedly drained CNY48 bln via 14-day repo operations, the first such operation since the middle of last year. This helped push the Shanghai Composite off its two month high set yesterday. Many observers see the PBOC’s action in response to the news over the weekend of record growth in the aggregate financing and following reports that officials had encouraged banks to temper loans late in the month. There is some suggestion that PBOC officials are uncomfortable with the 7-day repo rate being below 4%, as that reflects excess liquidity.
Moving in the opposite direction was the Bank of Japan. The disappointing Q4 GDP figures reported yesterday, not only showed growth half of what was expected, but the deflator remain entrenched in negative territory. Today the BOJ announced the expansion of two of its special loan facilities. The move had been widely expected, but in March, when the programs were to end, rather than this week. The size of the facilities were doubled and were extended another year. Although the moves seemed largely “housekeeping”, the markets responded quickly to the BOJ preparedness to act. The Nikkei rallied 3.1%. We note that while the Nikkei was falling through January, the small cap stocks held up better and this was also true for the first leg of the bounce beginning earlier this month. However, in recent days, the larger cap (Nikkei 225) has been outperforming the smaller cap (JASDAQ).
The yen, which has strengthened last week, despite the widening US premium and the rally in equities, sold off in response to the BOJ’s moves. The dollar rose briefly and narrowly through last week’s highs (!JPY102.70), though it was unable to be sustained. The dollar has moved above the 20-day moving average for the first time since Jan 23 and has not closed above since Jan 9. It is found near JPY102.35 now. A close above there would encourage a move to the JPY103.00 area. In the futures market, gross short yen positions have been being covered since before Xmas, but looks like the bears are coming out of hibernation, but the dollar has to prove itself here.
Two countries, both Sweden and the UK reported softer than expected inflation figures and both currencies were sold on the news. Sweden’s news was the most surprising. In January, consumer prices fell 1.2% and this was sufficient to drive the year-over-year rats back into negative territory (-0.2%) . The core rates was halved (year-over-year) to 0.4% from 0.8%. This is the lowest since 1998 and, although there is another CPI report due before the April 9 Riksbank meeting, the specter of deflation impacts policy expectations. The euro has rallied above SEK8.90 for the first time since January 10 and is well above the 100-day moving average (~SEK8.8540), which it has been mostly staying below over the past month. Above SEK8.92 retracement objective, there is potential toward SEK8.95-SEK8.96 before contemplating a move back above SEK9.0.
The UK had a surprise of its own, but last minute speculation/rumors got it right. The CPI in January fell 0.6%, and brought the year-over-year rate to 1.9% from 2.0%. It was expected to be unchanged, with risks to the upside. The recent peak was 2.9% last June. The core rate, which excludes alcohol, tobacco, food and energy fell to 1.6% from 1.7%. (it was expected to have ticked up to 1.9%) and is now the lowest since June 2009.
The news helps bolster the BOE’s case for rates being on hold for longer. The June 14 short sterling futures contract has edged higher (lower rates) to record new 8-month highs, while the March 15 contract has recovered almost 2/3 of what it had lost since last week’s Quarterly Inflation Report, the growth upgrade and forward guidance adjustment. Sterling itself held above last Friday’s lows (~$1.6645) on the pullback, before recovering back to $1.6700. . Immediate resistance is seen near $1.6740.
In keeping with the two for Tuesday theme, we offer two more developments. First, in Australia wage growth slowed as expected in Q4 and the Aussie initially responded well to the fact that the RBA minutes had, like the verbal commentary, had dropped the reference to the exchange rate being “uncomfortably high”. However, the China snugging may weighed on the Aussie, which had risen to new 5-week highs (~$0.9080). It has stabilized just above $0.9000. However, a close below yesterday’s lows (~$0.9025) could potentially undermine the technical tone.
Second, the German ZEW was decidedly mixed. The assessment of the current situation was better than expected at 50.0, up from 41.2 (consensus 44.0). This is the highest since Q3 2011. However, this is the best it gets as the expectations component deteriorated to 55.7 from 61.7. It is still at lofty levels to be sure, but this does represent the second consecutive monthly moderation. The euro is bid against the dollar, helped some cross rate demand. The Jan 23 high near $1.3740 and the 61.8% retracement of the drop from the Dec 27 high near $1.39 (~$1.3735) are being approached near mid-day in London. The real hurdle is $1.38, which the euro flirted with last October and then again in December, managing to close above it marginally only a couple times.