This is day three of a new quarter and the EUR price action is already boring. The forex asset class is being left behind by both equities and fixed income in excitement. Bond dealers are beginning to believe that the worst may be over for US treasuries. Perhaps the debt market can now be priced using fundamentals? While equities have investors with their new risk profiles revisiting 2007 index levels. When can we join in the fun? The market is trying to turn investors attention to the prospect that rally on risk can continue into Q2. Itâ€™s the contrarian who believes we are still in need of real correction to gauge the sustainability of the rally, rather than these contained flat-lining incremental EUR ranges.
The EUR bears nightmare is that a real correction might not arrive until risk markets have rallied further. A realization that the global growth outlook is not that healthy, coupled with elevated energy prices could help to promote a correction in this â€œbull market.â€ In this scenario we would hear more about QE from the Fed and perhaps further manipulation of crudeâ€™s strategic reserves. Maybe it is time for the bears to begin shifting their fears from a â€œnoâ€ correction to one where risk markets will continue to rally â€œwithoutâ€ a correction. It seem either scenario will lead to a messy squeeze.
For now we live off the global PMI scraps, central bank rhetoric and Euro periphery comments. The suspense of the RBA announcement earlier this morning was not worth it. They kept the cash policy rate on hold at +4.25%, and it was no surprise that they also sounded dovish, allowing the AUD to remain on the back foot. Governor Stevens and his policy makers judged that it would be prudent to wait for the inflation data before easing. The policy statement said that, â€œIf demand conditions were to weaken materially, the inflation outlook would provide scope for easier monetary policy.â€ The futures market continues to price in a 75bp ease by year end, a factor that was going to continue to weigh on the currency no matter what.
Equity markets, to this point, have had a very strong start to Q2, largely on better than expected UK, US and Chinese PMI data. Last nights Chinese non-manufacturing sectors release was no different. It rose to 58.0 in March from an upwardly adjusted 57.3 in February. Even with the seasonal adjustments, the current level of the PMI is historically knocking at the high end of its range. Another factor bullish for risk, despite the Euro-zones periphery concerns. Spanish worries will continue to try and act like a dead weight no matter what positive economic data is being thrown at investors this morning.
With the global economic calendar being rather quiet today, market focus will probably fixate on the FOMCâ€™s minutes this afternoon. The most recent statement featured an acknowledgement of improved labor market data and of higher energy prices. However, many believe that the minutes might provide details on the pros and cons of easing policy options. Maybe a mention of operation twist, sterilized and/or unsterilized security buying? However, none of this is a perquisite to rebuild QE expectations.