Europe & Asia: where the bank minus is going to?

Low trading activity will be observed on Monday, although the US session will work in full. Volumes will recover no earlier than Wednesday, but now the current market positioning gives to the dollar another chance to strengthen.

Hopes for a quiet week did not materialize. Explosions at the Brussels airport again demonstrated market «resistance» to political news - sale of risky assets were short, the European assets were mostly dumped, but only the yen used this factor actively. Low trading liquidity left the general arrangement almost invariable.

After the comments of some Fed’s representatives, their positions of rates were, to put it mildly, "adjusted", the dollar again closed the week by increase more than the percentage of a major currencies basket. Coordinated reaction of world regulators to the last FRS statement - the BJ`s Deputy Governor Nakaso declared that Japan is ready to push interest rate even deeper, and China`s vice finance minister has confirmed that exchange rate deal between China and the USA exists. Active comments of the FRS officials concerning April increase proceed that it is possible to consider either developing attack, or conscious preparation of the markets for planned increase of rates.

The modern central banks have practically destroyed the market of government bonds, moving even the reserve capital in to the corporate debt and instant profit, without looking at the increasing of the risk. For Europe, zero and negative profitability is a new problem, the first effect of which has been felt recently. Experiments of Draghi and Kuroda with negative rates have led to the fact that the bonds of $ 8 trillion bring negative profitability now, so the European and Japanese investors have to look for new assets. And they really exist - in the USA. Coca-Cola, General Electric, Exxon Mobil and dozens of other companies experience an active flow of Asian and European money.

Nervous and unsecured euro is worth much more expensive now than it is due to the fundamental indicators, and that inhibits the ECB fight with deflation. Nevertheless, the downward trend for the euro has not been canceled yet. From the beginning of the year, the most significant drivers of euro's stability have been diversifying of reserves and volumes of foreign exchange hedging by large speculators. The share of the euro in the foreign exchange reserves of central banks have been actively decreasing - obviously by buying European assets by the main regulator. Incentive measures the ECB and the Fed's reluctance to force events creates the prerequisites for recovery of the global MSCI positions today, and speculative positions in USD have decreased by 80% since the beginning of 2016, which also does not support the steady growth in EUR/USD.

According to Bank of America, government bonds of Japan with period of repayment up to 10 years give negative profitability, and average profitability of corporate sector bonds is only 0,2%. Nevertheless, Japan again has sold 30-year bonds with record low profitability (47 basis points).

Despite chronic negative net and recent tax boost on sales in 2014 from 5% to 8%, Japan last year (2015) has spent nearly 100 trillion yens, and the incomings has received less than 50 trillion, having added this difference to the already over commitment national debt (240% of GDP). However, there is no sale really - the government just rented this amount on put option to fast money traders who still hope they will be able to receive a capital gain soon, and then re-sell papers to BJ.

This week the data of the American Non-Farm Payrolls and his Canadian colleague with the data on GDP, and also new figures for inflation in the EU are the focus of attention. Expectations of European statistics are only negative.

From the other news it should be noted the following:

  1. It’s another reason not to believe public polls: there is information that since the beginning of 2016 the options market players have put at least £11 billion to reduce the British currency to $1.3500 or below and that are the levels of 30-year old. Even half of these volumes could bring down the pound for 3-4% below the current level before the referendum - it turns out that investors have seriously started to prepare for the possible exit of Britain from the EU. The chances of such a fall are estimated by analysts rather high (60-75%).
  2. Financial problems of the European Union have already become the subject of speculation. Not only the British are going to escape from a sinking ship. Czech Prime Minister warned that if Britain exits the EU, the Czech Republic may follow it. The Netherlands is also configured to hold such a referendum.
  3. Against the backdrop of a series of bankruptcies of hedge funds information that Credit Suisse is again in the "trap" of liquidity for debt securities does not surprise. Losses due to write-downs amounted to approximately $258 million only in the current year and $495 million in the IV quarter due to bad debts and loans, including mortgage credit obligations.

Low trading activity will be observed on Monday, although the US session will work in full. Volumes will recover no earlier than Wednesday, but now the current market positioning gives to the dollar another chance to strengthen.

EUR/USD: The key mark is saved - 1.1160 is maintained. Strong intraday system of supports 1.1150/1.1100/1.1090 protects the important level of 1.1111. Strong resistance: 1.1190/1.12500/1.1320. Trading below/above these marks will determine the medium-term scenario. At the moment the upward direction is more likely.

USD/JPY: Basic resistance: 114.90/114.60/114.20/113.82. Basic support: 113.30/112.80/112.50/112.00. The next danger zone of market makers is at the level of 114.50. To continue the growth we need the break above 114.00, and for breaking down it needs to close below 113.20. Until NFP the forecast to move up is positive. We follow the American statistics.

Author: Lachlan Patel,
ForexChief Currency strategist