Risk Aversion Dominates and Global Selloff Continues

Risk aversion dominates the financial markets today. European indices are trading broadly lower with FTSE leading the way by losing more than -0.7%. CAC and DAX are both down -0.5% respectively. DJIA had the worst day for this year yesterday and is set to extend the sharp fall as suggested by futures. Nikkei lost -2.13% earlier today as additionally pressured by report of North Korea’s failed missile test. Stocks are sold off sharply on concerns that US president Donald Trump doesn’t have the ability to fulfil his election promises and push through his policies. Those include tax cuts and infrastructure spending. US House is set to vote on Trump’s healthcare plan and that is seen as a litmus test for him. In the currency markets, Yen is leading the way higher on safe haven flow, followed by Swiss Franc. Aussie is trading as the weakest one.

ECB: Protectionism may increase trade deficit

ECB said in a study paper released today that protectionist trade policies may increase a country’s trade deficit, rather than reduce it. The paper noted that "adopting policies that facilitate innovation and reduce protectionist barriers may help to improve an economy’s competitiveness." And, "multilateral initiatives aimed at trade and financial liberalization may also reduce an economy’s external imbalances." Meanwhile, "participating in global value chains may give an economy a temporary competitive edge that results – in order to smooth consumption over time – in a rise in its current account balance.

Separately, ECB governing council member, Bank of France head François Villeroy de Galhau said that it’s a "clear no" for the central to stop accommodative monetary policy. He said that "without monetary stimulus, the recovery in inflation would not yet be self-sustained or durable throughout the euro area."

BoJ members rejected lifting bond yield targets

BOJ’s minutes for the January meeting sent little news about Japan’s monetary policy stance. Policymakers discussed about rising JGB yields but the majority rejected the idea of raising the 10-year JGB yield target to match expected gains in Treasury yields. The members suggested that BOJ should focus on achieving the 2% inflation target. As noted in the minutes, "although some market participants speculated that the Bank might consider raising the target level of the long-term interest rate in response to such factors as a rise in the U.S. long-term interest rates, its monetary policy decisions should be made solely based on the viewpoint of aiming to achieve the 2% price stability target".

Japan trade surplus widened to JPY 0.68T in February, above expectation of 0.55T. Exports jumped 11.3% yoy, fastest since January 2015. Exports to China jumped 28.2% yoy, accelerated from 3.1% yoy in the prior month. Some analysts noted that even stripping out the Lunar New Year effects, exports still picked up as a trend. All industry activity index rose 0.1% mom in January.

NZD/JPY dives on risk aversion ahead of RBNZ

RBNZ rate decision will be a major focus in the coming Asian session. The central bank is widely expected to keep the Official Cash Rate unchanged at 1.75%. It sounded neutral in last statement and just noted that "monetary policy will remain accommodative for a considerable period." There was no explicitly mentioning of its policy bias. RBNZ will likely maintain such stance. Meanwhile, it would likely reiterate that "exchange rate remains higher than is sustainable for balanced growth". And, "a decline in the exchange rate is needed."

Kiwi is relatively steady against Dollar this week. But NZD/JPY dives notably on risk aversion. The rejection from 83.36 key long term resistance confirmed medium term topping at 83.76 back in January. The development also indicates that rebound from 68.88 (2016 low) has completed. Medium term outlook will now stay bearish as low as 80.43 support resistance holds. 38.2% retracement of 68.88 to 83.76 at 78.07 is seen as an important support. But based on current momentum, this support will likely be taken out as the cross head towards 61.8% retracement of 68.88 to 83.76 at 74.56 ahead.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 111.21; (P) 112.03; (R1) 112.54; More…

USD/JPY drops to as low as 111.13 so far today and is pressing 111.12/13 cluster support. Such support level represents 61.8% projection of 118.65 to 111.58 from 115.49 at 111.12 and 38.2% retracement of 98.97 to 118.65 at 111.13. At this point, we’d still anticipate strong support around 111.12/13 to contain downside and bring rebound. Break of 112.86 resistance will turn bias back to the upside for 115.49 resistance first. However, sustained break of 111.12/13 will bring deeper decline to 100% projection of 118.65 to 111.58 from 115.49 at 108.42.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Nonetheless, sustained trading below 55 week EMA (now at 111.19) will extend the consolidation from 125.85 with another fall through 98.97 before completion.

Economic Indicators Update