ECB Bond Buying Program Launched, Euro Firms

The euro finished last week three standard deviations below its 20-day moving average. Even though the returns in the foreign exchange market are not normally distributed, this is a rare event, and reflected the stretched technical condition of the dollar following the stronger than expected US jobs data. After a slow start in Asia, the euro climbed from a little below $1.0825 to $1.0900, were sellers awaited.  

The other major foreign currencies also edged higher against the dollar, with sterling matching the euro’s gain.  It pushed through the $1.51 level in the European morning, but ran out of steam in front of the first retracement objective the losses seen at the end of last week (~$1.5515). 

The dollar consolidated its recent gains against the yen, even though Japanese data were disappointing and the Nikkei fell by nearly 1%. Th 10-year JGB yield rose 3 bp to almost 42 bp, which is the highest since February 17. Japan revised lower Q4 GDP to 0.4% from 0.6% quarter-over-year, with the annualized pace slowing to 1.5% from 2.2% of the initial estimate. The deflator ticked up to 2.4% from 2.3%. This is mostly a reflection of the sale tax increase last April. It will drop out of the base effect shortly, and this is encouraging speculation that the BOJ will have to take more action if the inflation target is to be realized. 

Separately, Japan reported January’s current account surplus of JPY61.4 bln. This is much smaller than expected. Yet it is the first January current account surplus in the month of January since 2011. However, the trade deficit was smaller than expected at JPY864 bln. The consensus expected a JPY936 bln shortfall. The other major component of the current account is the investment income balance. It stood at JPY1.41 trillion.  

Germany reported a smaller than expected January trade surplus. The 15.9 bln euro surplus compares with the consensus forecast of 19.5 bln euros. Exports fell 2.1% against a consensus forecast of a 1.5% decline. Exports in December were revised to a 2.8% gain from 3.4% initially reported. Imports were also weaker than expected. They contracted 0.3%. The market had expected a 0.5% expansion. Despite the smaller trade surplus, the current account surplus of 16.8 bln euros was slightly larger than expected, but down from the revised 25.6 bln surplus recorded in December.