Returning from being out over the last couple of weeks it seems as though global markets look in a much worse state than when I left. Nonetheless, a semblance of calm returned to markets overnight helped in part by comments from European Central Bank council member Coeure that the ECB may restart its Securities Market Purchases (SMP) programme to support Spanish bonds while Spanish Prime Minister Rajoy denied any need for a Greek style bailout.
Consequently equity markets have firmed helped also by a solid start to the US earnings season from Alcoa. The lack of any fresh positive fundamental news suggests that any risk rally will be fragile. Renewed Spanish and Italian debt worries will not fade quickly while growth concerns have been reignited by last week’s weaker than expected US jobs report.
This leaves currencies in a state of limbo. After having dropped over the last couple of weeks the EUR has stabilised at a weaker level versus USD. In contrast as warned previously the risk of a pull back in the JPY was very high and subsequently it has strengthened sharply from its lows close to 84.00 against the USD. However, comments from the Bank of Japan’s Shirakawa that the BoJ will continue to pursue “powerful” monetary easing may help to limit the bounce in the JPY to technical support around 80.69.
AUD has been on a downward trajectory as the yield differential with the US has narrowed but the currency benefited from a strong March employment report in which the number of jobs added (+44k) was far more than forecast. As a result expectations of further rate cuts from the Reserve Bank of Australia have been pared back. Much will depend on the Q1 CPI release on April 24 to provide further clarity on the prospects of a May move. China’s GDP data tomorrow will provide further direction and will help to determine whether the bounce in AUD can be sustained.
An upcoming Italian bond auction today as well as US Q1 earnings will garner most attention in the absence of first tier data releases. The main event of the week will be tomorrow’s GDP release in China, however. It will require positive results for all of the above to maintain the rally in risk currencies and consequently downward pressure on the USD. However, it seems that markets are in corrective mode and fresh Eurozone and global worries will likely limit any risk rally, leaving the USD well supported.