Capital Markets: "Euro and Yen Volatility Slips to New Five-Year Lows on the Ides of March"

There seem to be quite a few references to knife crime in Rome across various media today. Might as well join in:

Reverse side of a coin issued by Brutus in 

the autumn of 42 BC, with the abbreviation 

EID MAR (Eidibus Martiis – on the Ides of 

March) under a "cap of freedom" between two daggers 

—Wikipedia

From Marc to Market:

Overview: The capital markets are calm ahead of the weekend. Outside of Australia and Thailand, Asia Pacific equities advanced, while European shares are mostly little changed. The regional benchmarks, like the S&P 500 have recouped last week's losses. Benchmark 10-year yields are little changed on the day, leaving the US 10-year yield virtually unchanged on the week near 2.62%. The benchmark Japanese government bond yield has hovered around minus five basis points, while European bond yields were mostly a little higher, except for Italy, where the yield has eased around three basis points to 2.52%. The US dollar is softer against all the major currencies and most of the emerging market currencies. The dollar has traded with a heavier bias this week, following the disappointing headline job creation reported a week ago.

Asia Pacific
The Bank of Japan stuck to its knitting. As widely anticipated, policy was unchanged. The central bank cut its assessment of exports, industrial output, and foreign growth, in line with the recent string of economic data. There continued to be two dissents (Kataoka and Harada) from a more dovish position. While many Japanese officials recognize that the 2% inflation target is not realistic, there has been so much that has been sacrificed in its name, there is a reluctance to abandon it. There is also a problem with the credibility of the new target. In its own way, the BOJ appears to have stumbled into the fallacy of sunk costs. The other problem is that Japan is committed to raising the sales tax in October to 10% from 8%. Even though the government is trying to soften the blow through consumption incentives, the economy, which contracted in H2 does not have strong growth impulses in the early part of 2019.

China's National People's Congress session has come to an end. Premier Li reaffirmed CNY2 trillion tax cuts will go into effect on April 1. The other significant policy initiative is a new law that ostensibly provides for equal treatment of foreign and domestic firms and bans forced technology transfers. What China says, its declaratory policy, is rarely an issue. Officials often seem to say the right things. It is the operational policy, what it does, where the proverbial rubber hits the road, that is problematic.

The Japanese yen is the only major currency to slip against the US dollar this week. It is off a little more than 0.5% with the greenback near JPY111.70. The dollar has traded in a single yen range this week. It had begun the week, slipping briefly through JPY111.00 and set the week's high just shy of JPY112.00 in early Asia, where a nearly $400 mln expiring option is struck. There are also about $950 mln in options that will also roll off today between JPY111.50 and JPY111.65. Three-month implied volatility is easing to new five-year lows today near 5.6%. During the flash crash at the start of the year, the implied volatility reached almost 10%. The Australian dollar is set to snap a three-week decline with a gain of around 0.5% (~$0.7080). The Aussie has been capped by the 20-day moving average, which is found now near $0.7100, for nearly the past three weeks. The Chinese yuan is little changed this week (~CNY6.714). Starting last December, the yuan has fallen only one week per month and here in March that was last week, when the dollar rose nearly 0.25%.

Europe
Brexit keeps on giving. The next act in the drama is clear. There will be another vote on the Withdrawal Bill early next week. If it passes, May will seek a three-month extension to legislate it. However, if it does not pass, the length of the delay would be left in the EU's hands. The Withdrawal Bill has been defeated resoundingly twice. Why will the third time be any different? This is how the brinkmanship is being played out. Each time, the alternatives are fewer. No one likes the Withdrawal Bill as the historic loss of the first vote demonstrated. There has been hope of an alternative, but the alternatives continue to get blocked and, May's strategy is for those alternatives to be even more unpalatable than the Withdrawal Bill....

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