If Friday’s release of US April CPI showing core inflation at an unexpected two-year high was an aberration, then today’s quadruple upside surprise in US data was no exception. Durable goods orders, new home sales, S&P/Schiller house prices and consumer confidence all surprised to the upside today, further pushing USDJPY to fresh seven-year highs, while knocking down all currencies against greenback.
The 1.0% jump in durable goods –excluding defence orders—contributes towards a vital advance in April equipment spending and the calculation of Q2 GDP, especially as Thursday’s final release of Q1 GDP is seen revised to -1.0%.
The holiday shortened week will not be short of reasons to re-enter USD longs, especially as rising bond yields make the case for prioritising the greenback in the list of yen crosses.
By next week, markets will ask the question that was asked in mid- March: Why are yields low despite brighter growth outlook?
Tsipras leans to Government reshuffle
The extended divergence between improvement in Eurozone macro dynamics and conflicting signals from Greece public officials has kept the euro relatively supported until a new batch of US inflation data began to drag on the single currency.
As Greece faces its next four payments to the IMF, totalling €1.6 bn by end of June, it is increasingly finding itself in the position of having to choose between declaring an outright default on its bailout program and making U-turns on its election promises, which implies a breakdown of the current government.
A government reshuffle in Athens is seen as the most likely oucome, in which case would unleash the departure of several radical members and force lead Tsipras to change Syriza’s coalition party. A government reshuffle would help avoid the uncertainty associated with a referendum (on Greece Eurozone exit) or snap elections and pave the way for the “new” government to pass resolution on pension reforms, thereby allowing Greece to return to final agreement before payments are due by end of June.
Euro bears may find fertile ground in the event of a referendum as the environment will be exacerbated by capital controls on bank withdrawals and transfers. Such a situation would combine the euro gloom of the May 2012 elections with that of Cypriot depositors’ exodus in July 2013.
The impact of any positives from stabilisation in Greece risks on the euro will likely be absorbed by a gradual improvement in US data, further building the case for an autumn rate hike. But once markets absorb the notion that any Fed hike this year would be all but a tightening of conditions, the case for buying the euro dips is more alluring than chasing the lows.
Why USD/JPY has soared
Aside from the better than expected US figures, the main reason to the latest rally in USD/JPY is the latest report from the IMF on Japan calling for for further easing. The IMF said:
“The BoJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2 percent inflation target in a stable manner: Additional easing: Reflecting the weak and delayed transmission, further easing should take the form of increased asset purchases and lengthening their duration”.
This means the Bank of Japan will most likely step up its monthly asset purchases in September or October. Unlike other central banks, which have been pressured for pursuing a quasi beggar-thy-neigbour currency policy, the Bank of Japan continues to get special treatment due to its exceptionally deflation-prone demographic conditions. 125 in USD/JPY is increasingly becoming reality.
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