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Fundamental Afternoon Wrap: EUR supported by weak dollar and Japan to resume talk down

As we look across our afternoon institutional research with a close to nonexistent economic calendar today, developments have generally echoed the morning sentiment. namely, little has changed for the Euro and the USD weakness ahead should contribute to supporting an elevated exchange rate. JPY is the other key area of focus, with the almost flippant continuation of talking down the Yen by PM Abe, just days after the G7 & 20 took a lenient stance on Japanese monetary policy.

EUR/USD

Brown Brothers Harriman analysts feel that the main European focal points of the week will be the German ZEW survey on Tuesday and the Italian elections on Thursday. They note that they are still seeing an especially tight correlation between the US and German 2 year yield spread. Scotiabank pick up on Draghi´s speech today, commenting that he offered little new, suggesting that policy is accommodative and reminding markets that he never pre-commits. Further, they add that today's LTRO repayment announcement of EUR 3.8bln by 9 banks, was virtually ignored by markets.

Nick Bennenbroek of Wells Fargo expands, highlighting comments from the ECB´s Nowotny who states that there is no immediate need to intervene in the currency markets. Goldman Sachs strategists have a long term bullish view for EUR/USD which is primarily driven by their bearish USD view. They write, “The weak balance of payments of the US vs the stronger BBoP trend for the Euro area still implies a weak USD and a stronger EUR.”

USD/JPY

Nick Bennenbroek of Wells Fargo notes that Yen has softened following the G20 meeting and further dovish comments from Japanese PM Abe, who said that he would consider buying foreign bonds and amending BoJ law. Brown Brothers Harriman analysts expand on this sentiment, noting that USD/JPY has claimed the 94 level, although the pair fell short of the Tuesday high of 94.46. TD Securities analysts offer similar thoughts on Abe´s words.

Nomura report that Haruhiko Kuroda is now expected to be the next BOJ governor by most of their survey respondents, but there is still no clear consensus. Scotiabank add that technically USD/JPY is starting to look a bit bearish. Goldman Sachs strategists note that the Yen has weakened significantly since late September and resulted in a stretched accumulation of speculative short positions. They write, “order for the move in the Yen to be sustained, we believe that the BoJ and the Japanese administration need to reinforce their rhetoric with firmer communication and forceful action.”

Macro

Goldman Sachs analysts note that with Central Banks pivoting towards a focus on exchange rate developments, traditional inflation targets are slipping into the background and softening. As such, they recommend that investors prepare for two key market features, “continued low volatility and relatively sudden directional moves, which can be described as realignments, often in response to growing inflationary pressures.”

Meanwhile, shifting to commodities Michaela Moran of BAML notes that in energy terms, the world is becoming more dependent on OPEC, with demand outstripping current production. However, she poses the question of whether Iraq could be the savior in this scenario, with the beleaguered nation offers the capacity to up its production levels. Brown Brothers Harriman analysts finish the round up by noting that that it was the first day of trading for the Chinese year of the Snake, but stocks finished lower. However, they foresee a continuation of a constructive outlook, with macroeconomic data and the policy framework supportive of local assets.

Forex Flash: An improvement in Chinese economy may look to contain prices – NAB

China’s monetary aggregates were also released for January, showing a sharp up-tick in credit for the month. While this is a positive sign for credit demand in the economy, it could also partly represent a bringing forward of demand ahead of LNY. Similarly, reports of a clamp down on credit issuance late last year (as some banks approached their credit limits) may have resulted in some pent-up demand as well. According to the NAB Analyst Team, “While the magnitude of these effects is difficult to gauge, they could suggest that the strength in January may not be sustained over coming months.”
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