Data/Event Risks
- FX: Markets are dazed and confused after yesterday’s statement from G7 and subsequent ‘clarification’, so the risk is for further volatility, especially if more politicians and/or central bankers put their oar in.
- GBP:Â The currency will pay close attention to the Inflation Report today for signs that the Bank of England would like to see the pound lower, or is not concerned with it weakening. Any indications along these lines would be taken as a justification to take the currency down another notch.
- JPY: Hopes are slim that we are going to see anything radical from the Bank of Japan tonight, given that the main man is due to leave next month. The GDP data will be of interest, but it’s really only showing where Japan is coming from. The real focus now is how the economy reacts to policy changes, both those that are anticipated and those already announced. Stronger GDP would be modestly yen supportive.
Idea of the Day
Yesterday was nothing short of a roller-coaster in FX markets, but we’re left wondering just what the global elite think about recent FX moves. The G7 statement on FX seemed to say nothing, so markets took that as a signal to sell the yen. This was followed by a story from a G7 ‘source’ suggesting that markets had misinterpreted the statement, which appeared to imply that they were concerned with the recent weakening of the yen. As such, markets were left wondering what to think. But should we really care what these people do or say? The short answer appears to be yes. Studies have tended to show that these statements of intent can influence currencies for up to 3 months ahead, but are not worth bothering about beyond that. Still, for now it’s made investors nervier about pushing the recent trends (weaker yen, strong euro, weaker sterling).
Latest FX News
- JPY: Yen bears were side-swiped not by the G7 statement but by the supposed ‘clarification’, which only confused matters further and triggered a wave of short-covering. USD/JPY had been looking perky and comfortable up near 94.25, but has subsequently fallen back to around the 93 area. Likewise EUR/JPY, which fell from near 127 to below 125 at one stage overnight. These days, yen trading is only for the fleet-footed.
- EUR:  Wobbled badly last week but has been much more solid in recent days, now up around 1.3450. Draghi’s ebullience on Europe seemed to assist the mood.
- GBP: Cable fell to a fresh 6m low of 1.5572 as the sellers took charge once again. However, the G7 statement appeared to encourage some short-covering. Inflation Report is critical today – any sign that the BOE wants/likes a weaker currency will be grist to the mill for currency bears.
- AUD:. Fading the extremes of the 1.02-1.06 trading range came up trumps once again yesterday, with a powerful jump in the Aussie of more than 1%. Stronger-than-expected consumer confidence figures helped, as did reports that the housing market down under is in reasonable shape, triggering a re-appraisal of the recent considered wisdom that the RBA is poised to lower rates.
