Shadow fighting and «hot money»

Last week there has passed an insider from Bloomberg that the Bank of Japan considers the possibility of bank crediting at the negative rate

The market has obviously not upset due to the lack of the arrangement in Doha, the oil prices have passed about 7% in a day and now dangle where were last Friday. The meeting of ECB hasn't brought serious decisions and shadows of FRS and BOJ begin to press on the markets now.

Importance of an oil meeting has been exaggerated, each participant wanted to achieve the political profit from an event, and therefore they have not reached discussion of the eye of a problem. Actually positive dynamics of the raw markets was provided not by OPEC or negotiations, but otherwise factors, and main from them - FRS position. Everything has begun after the Central Bank has decided to raise rates only twice in the current year, but not four times. The dollar has braked growth, the cost of loans has decreased, market money became cheaper – resources for risky speculation have appeared. In addition, oil - only one of the markets where "hot" money came to light. There is a full-blown buying up of bonds and currencies of developing countries (ruble, real, Mexican peso, yuan) today and even small speculators can manage to participate in it.

As expected, the press conference of ECB was of interest only as an example of Mario Draghi`s oratory. Only the announcement of technical details of the corporate bonds purchase program is worth noticing - it was more impressive:

  • it is planned to acquire bonds of the non-bank companies with a rating not below BBB (a repayment period from 6 months to 3 years);
  • issuers must be EU corporations (at the place of registration) or subsidiaries of the corporations having founders out of the Eurozone;
  • buying up will happen in primary and secondary markets, except state companies;
  • a limit of purchases - to 70% of release, except state companies;
  • insurance companies take part in the program of purchases subject to implementation of the main requirement (not the bank has to be the founder);
  • corporation bonds which have banks in structure are also subject to repayment;
  • corporate sector purchase program (CSPP) begins in June, 2016.

It is planned that the CSPP program has to cause capital inflow into the Eurozone that is growth of euro at least at the initial stage. The general amount of assets which can be already realized within CSPP is estimated from €444 billion to €800 billion. If buying up goes on the top level, then without SCO of member countries, ECB there will be enough money for 10 months at the current size euroQE.

If the Brent prices are stabilized, inflation in the Eurozone will grow after all, it can lead to increase of ECB deposit rate from minus values and to reduction of a share of purchases of member countries state credit obligations. It is possible that the CSPP is the first stage of gradual curtailing of ECB ultra-soft monetary policy.

FRS meeting on April 27 will through passage, without new assumptions and we won't even see the old woman Yellen at press-conference. Probability of FRS rate increase is almost zero though the general requirements of FRS members for rate increase are fulfilled. FRS just there isn't enough courage for serious decisions. Most likely, within G20 has been reached the agreement to postpone FRS rate increase at least until the summit G7 on May 26-27, so a spring gift on way. It is possible to expect (taking into account growth of the stock and raw markets) rather hawk FRS statement in favor of dollar growth.

Last week there has passed an insider from Bloomberg that the Bank of Japan considers the possibility of bank crediting at the negative rate and at the same time to reduce rates on excess reserves. The analogy to ECB TLTROs arises, but target value isn't announced, and therefore in case of acceptance growth of USD/JPY is expected impressive.

Most likely, the Central Bank of Japan will postpone the decision on easing so far, but can begin it earlier, than was planned, while weak economic reports and consequences of a powerful earthquake in the country threaten inflation acceleration. It is also declared a possibility of extension of the QE program due to purchases of exchange-traded funds ETF. If at the future meeting on April 28 BOJ doesn't take additional measures, but announces their acceptance at June`s meeting, then long dollar/yen can give a real profit.

Current week should pay attention to the statistics block in the light of the previous Draghi`s promises: Eurozone economic growth, the first estimate of Great Britain`s GDP and a preliminary estimate of the US GDP gain in 1 quarter, and also on the corporate reporting of the largest technological sector companies: Apple, Facebook, 3M, MasterCard, United Technologies, UPS, AT&T.

From other news the following is interesting:

  1. Historical Deutsche Bank admission the fact of illegal gold and silver price manipulations has led to the agreement which includes not only large compensations, but also the help of the bank in prosecution of other participants noticed in speculation. It is claimed that defendants, including The Bank of Nova Scotia, under cover of the reference price fixation procedure (The London silver fixing) criminally conspired and within 15 years, actively manipulated by bid-ask spreads interim the trading day at the expense of clients. The Supreme Court of Ontario has noted 3 claims already for the approximate amount of $1.7 billion from the Canadian investors, claims of the American clients actively prepare. It is recommended to watch closely a subject: now all who lost money in trade on metals for the specified period will demand compensation and it`s unknown so far how it`ll affect the markets.
  2. On Friday before a meeting with Ministers of Finance of the Eurozone the Managing Director of the IMF has declared "critical doubts" concerning the published Greece deficit indicators for 2015. If they are really so positive, then can change to the best prospects of external financing. But last data which traditionally after check were exposed to revision don't give to Greece a new limit of trust yet.
  3. The U.S. President has made a visit to Great Britain that the first of world leaders to congratulate Queen Elizabeth II on anniversary, and, therein, "to convince British to vote for membership in the EU as joint fight against terrorism is necessary". It is symbolical that at the same day the first gas (LNG) from the USA is sent to Europe, the tanker will arrive to Portugal on April 26 when FOMC meeting begins. Export from the USA started in February, 2016 with supply of fuel to Brazil. It`s the beginning of price war between the American LNG and Russian pipeline gas.

EUR/USD: couple is again lower than neutral range 1.1325-1.1412. Resistance: (1.1290-1.1295) / (1.1325-1.1367, especially strong 1.1333) / (1.1401-1.1412) / (1.1444-1.1480). Strong supports: (1.1264-1.1255) / (1.1222-1.1186). It`s very important where there is a price: above or below area 1.1407-1.1412. Steady trade will speak about high probability of transition of couple to other range above. However, the strong impulse is necessary for overcoming of a mark 1.1412.

USD/JPY: the next strong resistance: (110.78-111.57) protects important level 111.11. Downward pressure can increase at trade lower than the level 108.11. The next supports: (110.38-109.81) / 109.52 / (109.24-108.99).

Author: Lachlan Patel,
ForexChief Currency strategist