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Thoughts from the Trading Trenches

22 Years ago | February 27, 2014 6/6/23, 12:00 AM

In the March issue:

A Look Ahead to March - How high is the Bar Set? 

Japanese Fiscal Yearend: USDJPY Weaker or Stronger in March?

A Look Ahead to March - How High is the Bar Set? 

Looking ahead to March, the question being asked is how high is the bar set for the Fed to pause or change its pace of bond tapering and how high is the bar for the ECB  to cut rates. Given monetary policies pointed in opposite directions, the case for a strong dollar vs. the EUR is a compelling one but it would probably require the ECB to cooperate.

Bar for Fed Tapering

The bar is set high for the Fed to change its pace of tapering as theU.S.central bank continues to look at the economic outlook with a glass half full. The steady stream of Fed speakers, both hawks and doves, have showed no signs of wavering from the current pace of reducing the monthly bond buying by $10 bln per month. They appear to be looking past the current trend of weaker economic data as being impacted by a harsh winter in a good part of the country. In this regard, once the impact of winter has passed, economic data should rebound but it will be months before the true pace of economic growth can be determined.

Bottom line is that it would take a weaker US economy for the Fed to even consider a pause as it seems determined to wind down the latest round of bond buying before the end of the year. The debate will then shift to when the Fed will starting raising short-term rates and that will be likely be a data dependent decision. Currently, expectations are that the earliest time for a rate hike would be in the second half of 2015.

Bar for ECB Easing Monetary Policy

This is a hard call as the ECB has a history of disappointing market expectations. So here we go again as speculation is starting to build that the ECB may ease policy given inflation that has fallen below 1% per annum and farther from the around 2% medium-term target level, raising concerns over deflation. In this regard, there seems to be two options to ease policy: cut short-term rates and move them into negative territory or quantitative easing by buying bonds on an unsterilized basis.

I generally take a logical approach and it seems a no brainer for the ECB to ease policy and weaken the EURO. A weaker currency would be a way to boost prices and at the same time give some stimulus to an underperforming economy (Germanybeing the exception). The low level of inflation gives it room to ease as its mandate is a single one, price stability. However, ECB and Euro zone officials have showed little concern over the firm EURO. In addition, at the February ECB meeting, president Draghi indicated something to the effect that the central bank did not raise rates when inflation exceeded its target, implying it may be doing the same by not cutting rates on the current undershoot.

So it is market logic vs. the ECB and the latter often prevails. This is why I say that If this wasn’t the ECB, the case for easing policy would be a strong one. In any case, the start of March will see the ECB meeting as a key focus, especially because there will be revised economic forecasts that the central bank will use in making its decision whether to ease or not. In a market starved for a trend, it would be nice if the ECB joined the currency wars and gave a signal to sell its currency. Given its history we can only hope although it also says don’t hold your breath.  

Key Events:

March 6 ECB Meeting, March 7 U.S. Employment Report, March 19 FOMC decision, March 31 Japanese fiscal yearend

Jay Meisler, founder

Global Traders Association

Japanese Fiscal Yearend: USDJPY Weaker or Stronger in March?

I wrote about this at this time a year ago as I kept seeing comments about the tendency of the USDJPY to trade weaker ahead of the March 31 Japanese fiscal yearend. The assumption seemed to be that repatriations and window dressing would benefit the JPY but history suggests otherwise.

A looking at table below shows the USDJPY has closed the month of March higher in 7 of the past 11 years, including each of the past 4 years.

While this table does not take into account the trend going into March, which could have been an influence, evidence suggests a greater tendency for USDJPY to firm ahead of fiscal yearend. This suggests a risk on the upside if this pre-fiscal year end tendency continues.. However, this is not a slam dunk as positioning has been a restraint so far this year with the market short JPY waiting for a catalyst (e.g. monetary ease) to revive its downtrends as consensus forecasts are calling for a weaker Japanese currency this year (note as of this writing the JPY is firmer year-to-date vs. the USD and many of its crosses, e.,g. EURUSD). 

Jay Meisler, founder

Global Traders Association

Jay Meisler is the founder of the Global Traders Association, the advocate for the global trader and a co-founder of Global-View.com, the leading forex discussion site for more than a decade and home of the original forex forum