Dollar Range Bound as Trump and Xi Meet, ECB Draghi Said Policies Still Appropriate

Dollar trades in rather tight range as the markets await the summit between US President Donald Trump and China President Xi Jinping. They will greet each other at Trump’s Mar-a Lago retreat in Florida late in the afternoon and dine together. The summit will conclude with a working lunch tomorrow. Pressure is on Trump’s shoulder to deliver something concrete out of the meeting. Those would include bringing jobs "stolen" by the Chinese back to the US, ending China’s "currency manipulation", push China to use its "great influence" on North Korea, etc. Some market participants might have high expectation on the outcome of the summit. But other might just prefer Trump to move his focus back to tax reform, which is, in our view, more essential in determining the financial markets’ direction.

Released from US, initial jobless claims dropped 25k to 234k in the week ended April 1, below expectation of 250k. Prior week’s figure was revised up by 1k to 259k. Initial claims have now stayed below 300k level for the 109 straight week, the second longest streak since 1970s. Four week moving average dropped 4.5k to 250k. Continuing claims dropped 24k to 2.03m in the week ended March 25. Challenger job cuts dropped -2.0% yoy in March. From Canada, building permits dropped -2.5% mom in February.

Fed Williams: Takes around five year to shrink balance sheet

San Francisco Fed President John Williams said that it may take around five years for Fed to wind down the $4.5T balance sheet. And, "towards the end of this year would be a good time to take that next step" of normalization of the balance sheet, "assuming the economy progresses.

The minutes of the March FOMC meeting was overall hawkish. They outlined the steps to shrink the USD 4.5T balance sheet. The minutes noted that the reduction has to be "gradual and predictable", accomplished by "phasing out" or reinvestment and such process could start "later this year". No detail is provided yet but the minutes said Fed will "its deliberations on reinvestment policy during upcoming meetings and would release additional information as it becomes available."

Meanwhile, some officials are concerned that if unemployment falls further, it could pose "significant upside risk" of inflation. The minutes also showed "some participants viewed equity prices as quite high relative to standard valuation measures." More on FOMC Minutes: FOMC Might Begin Shrinking Balance Sheet In Late-2017

ECB Draghi: Reassessment of policy stance not warranted

ECB President Mario Draghi expressed today his confidence that "our policy is working and that the outlook for the economy is gradually improving." However, he emphasized that there was no "sufficient evidence to materially alter our assessment of the inflation outlook". Therefore, "reassessment of the current monetary policy stance is not warranted at this stage." And those include "interest rates, asset purchases and forward guidance."

ECB chief economist Peter Praet said that introducing the idea of a rate hike will undo some of the stimulus because of changed market expectations. He said that "if investors start perceiving that the path of the policy rate is subject to upward uncertainty … long-term interest rates will be pushed higher and asset purchases will become less effective." On the other hand, separately, Bundesbank head Jens Weidmann said that the time for ECB to scale back stimulus was fast-approaching.

Eurogroup Dijsselbloem urged UK and EU to stay away from the cliff

Eurogroup head Jeroen Dijsselbloem urged UK and EU to keep future trade relationship "as close as possible". He said that "the longer I think about it, the longer we study all the topics that need to be negotiated, the more worried I get. It is hugely complex, it is going to take a lot of effort from both sides to try and manage it." And, he urged to "try to stay away from the cliff of the [World Trade Organization] standards" as they would be very damaging to trade between the different regions."

Yesterday, the European Parliament voted 516-133, with 50 abstentions, for the phased approach of Brexit negotiation, rather than parallel. European Union chief negotiator Michel Barnier said yesterday that "parallel talks" on Brexit terms and future trade relationship is "a very risky approach". And, he emphasized that to succeed, "we need on the contrary to devote the first phase of negotiations exclusively to reaching an agreement on the principles of the exit."

Release from Europe, Eurozone retail PMI dropped to 49.5 in March. Germany factory orders rose 3.4% mom in February. Swiss CPI was unchanged at 0.6% yoy in March.

BoJ Kuroda favorite to get second term

In Japan, it’s reported that BoJ Governor Haruhiko Kuroda is Prime Minister Shinzo Abe’s favorite for the job. And Kuroda will likely renew for another five year term next year. Reuters quoted unnamed source saying that Abe trusts Kuroda and believed he did a "very good job". Also, the it’s believed that Abe’s administration is happy with impact of BoJ’s QQE program that keep government borrowing costs very low. The selection process for the next BoJ Governor will start in the second half of this year.

Release in Asia, Japan consumer confidence rose to 43.9 in March. China Caixin PMI services dropped to 52.2 in March.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 110.33; (P) 110.89; (R1) 111.25; More….

USD/JPY is still bounded in range of 110.10/112.19 and intraday bias remains neutral at this point. On the downside, break of 110.10 will resume the whole corrective decline from 118.65 and target 50% retracement of 98.97 to 118.65 at 108.81. On the upside, however, break of 112.19 resistance will indicate short term reversal and turn bias back to the upside for 115.49 resistance.

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 111.16) will extend the consolidation from 125.85 with another fall through 98.97 before completion.

Economic Indicators Update