Sterling Hammered To New Lows, Yen Pops

The British pound has been hammered to fresh lows just above $1.3115.  The euro is moving toward GBP0.8500.  The immediate catalyst is three-fold.  First, one of the UK’s largest property funds has moved to prevent retail liquidation. Second, the BOE reversed an earlier decision on the capital buffer for banks, which is tantamount to easing policy by boosting the banks’ lending capability by as much as GBP150 bln.  Third, UK services PMI was weaker than expected.  Nearly 90% of the responses were given before the referendum, but the sharp decline in business expectations warns of future problems, even though the new orders component rose 1.0 to 52.3.   Speculation is mounting that the BOE will ease monetary policy at its next MPC meeting on July 14. 

Sterling is the weakest of the majors, off 0.8%. The yen is the strongest of the majors, up about 0.8%. Although the yen’s gains in such an environment are usually referred to a function of safe haven demand, we continue to think this is a poor way to characterize the price action.  Who is buying the yen?  Yes, there are some speculators, and this has been picked up by the Commitment of Traders in the futures market, a proxy for momentum and trend following market segments. 

However, these flows are modest compared with the weekly MOF data. Last week’s report showed foreign investors sold more than  JPY2.1 trillion of Japanese bonds, one of the largest weekly divestments on record, and the second week of sales. They also sold Japanese equities (~JPY184 bln) for the second consecutive week. We suspect that Japanese investors and corporations are the biggest buyers of yen and that this is not so much a safe haven demand, as reactive hedging of overseas investments and earning.  

The buying of the yen is different than the buying of US Treasuries or other core bonds. US and Germany benchmark 10-yields are at new record lows. Peripheral yields are higher. Part of this may be a function of pricing in weaker growth and lower inflation, but it appears largely driven by capital preservation strategies.