Morning Commentary- May 27, 2013

With the U.K. and United States both observing bank holiday’s today, volumes will most likely be light and therefore could make for some interesting trading patterns and volatility.

Data flow has been almost non-existent, although the overnight session did kick off with the release of the minutes from the Bank of Japan’s (BoJ) latest monetary policy meeting.

The recent route in Japanese equities continued overnight, with the Nikkei collapsing 2.30% at the open and continuing its slide as the BoJ minutes were released. A few members on the board raised concerns around the feasibility of achieving the BoJ’s inflation target of 2% by the latter half of their projection period, with one member stating that price risks were largely tilted to the downside.

Board members also discussed the recent volatility in bond markets as being a consequence of the perception of contradiction between downward pressure on interest rates from large-scale bond purchases, while the desire to meet their price target would put upward pressure on yields because of inflation expectations.

The doubt amongst some board members that “Abenomics” will ultimately achieve its inflation goal in the desired time period has traders once again looking to shed exposure to Japanese equities, which is leading to JPY strength as short yen hedges by foreign investors continue to be un-wound. When the dust finally settled, USDJPY began to find support at the 101 handle, while the Nikkei finished its session down 3.22%.

Moving over to Europe, bourses that are open are firmly in the green, although with London being off for its Spring Bank holiday liquidity has been reduced. The Stoxx and Dax are up 0.75% and 0.68% respectively, while the EURUSD pivots in the mid-1.29s, up a modest 0.1%.

As we head into the North American open, the Loonie is struggling slightly, finding selling pressure as a result of weak equity performance and soft energy prices. Futures on US equity indices are trading electronically today, despite New York being closed for Memorial Day, and are experiencing a slight a offered tone to the tape. WTI is heading lower this morning, as sellers take the light-sweet crude benchmark back below $94/barrel. Gold on the other-hand is attracting some buyers, with bids pushing the yellow metal closer to the $1,400/ounce handle.

The Loonie was one of the worst performing major currencies last week, and from the middle of May has lost almost 3% against the big dollar. The Commitment of Traders (COT) report from the Commodity Futures Trading Commission (CFTC) on Friday showed that speculative traders pared some of their bearish bet on the Loonie, as the net short position was scaled back to $3.3bln, a drop of $1.0bln from the previous week. The USD on the other hand remains in favour, as the net long position increased by $9.3bln to $34bln, and highlights the notably bullish environment for the USD.

With a quiet start to the week due to bank holidays, the economic docket begins to pick up in the latter half. On Wednesday the Bank of Canada’s interest rate announcement will be outgoing Governor Mark Carney’s last before he assumes his new position as the Governor of the Bank of England. With Carney offering little new in regards to monetary policy during his speech last week, it is unlikely that the BoC will materially shift their communication before Stephen Poloz takes the helm; however, it will be interesting to see whether or not the recent soft inflation numbers are addressed. For Canada’s neighbour’s to the south, a read how the recovery in the housing sector is progressing will come by way of the S&P Case-Shiller HPI on Tuesday and Pending Home Sales on Thursday, although the spotlight will most likely be on the second estimate of Q1 GDP, forecast to hit the wires on Thursday in-line with the Advanced estimate of 2.5%.

Further reading: EUR/USD May 27 – Steady after Solid US, German Numbers Wrap Up Week

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