Equities in China, Japan and Europe are trading on a stronger footing today as markets outside of North America have shrugged off Wall Street’s slide yesterday, which was largely in response to the implications of a higher US dollar. Of particular note today is price action in both Japanese markets and the Yen as minutes from the Bank of Japan’s meeting on April 30th were released on Wednesday. Within that report the BoJ’s members took an optimistic stance towards inflation in the Japanese economy, largely due to the impact of falling energy prices, a stance which lowers the probability of a shift towards more restrictive monetary policy – at least in the mid-term. Responding to this, the Nikkei is trading higher, while the Yen has dropped out of a multi month trading range to hit 8 year lows against the USD.
Moving onto Europe, equity markets are showing signs of strength despite the very real possibility of an upcoming Greek default. With a June 5th deadline looming on an instalment payment to the IMF, both Greek and German policy makers are playing down the possibility of a default, and while this narrative seems to be accepted by European equities as the FTSE Eurofirst 300 rallies, the euro has taken a different tack, trading nearly half a cent lower relative to the greenback and a quarter cent weaker against the sterling.
After yesterday’s 1% decline, trading in S&P 500 futures indicate that index will regain its footing opening higher this morning. Much of the decline in the index can be attributed to emerging fears surrounding the impact of a higher USD on corporate earnings. This fear is not unfounded; with 50% of the earnings of index occurring outside of the United States a higher USD does not bode well for the translated earnings of the index’s constituents. Fuelling this concern are recent inflation reports and a slight shift in policy stance at the Federal Reserve which has effectively reaffirmed a 2015 timeline for the first rate increase since 2006. These two factors are driving the USD higher, with the DXY index up over a percent from earlier in the week and the USD trading sharply higher versus the Canadian and Aussie dollars, Yen, Sterling and Euro.
Additionally, for those trading Canadian dollars, today is set to be an eventful day with a Bank of Canada policy announcement. While expectations are that the BoC will stay the course in holding off on any rate cuts especially in the absence of any data indicating a sharp slowdown in employment and inflation, the BoC has caught us off guard before – so in any event, price action in the CAD can be expected to be quite volatile today.
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