Dollar seems to have found a bottom in its post-payrolls sell-off. Yesterday afternoon, investors began to pare their bets and buy the dip in the USD that had started on Friday afternoon. The dollar index is a shade lower from its four year high that it reached last week. It is a quiet week for US data but the beauty of currency markets means that one currency can be dragged higher by another’s weakness.
That is exactly what happened in USD/JPY overnight as speculation intensified that the next injection of Abenomics into the Japanese economy would be delayed. The new Japanese stimulus from the Bank of Japan is not the final move and must come in concert with additional fiscal measures. We had been looking for an additional sales tax increase in Japan following this April’s bump from 5% to 8%. We saw the impact of this year’s sales tax within the Q2 output numbers – the Bank of Japan will want to prevent another round of double-digit percentage losses in consumption spending while creating lasting inflation.
Risk around the yen has also been created by thoughts that the Japanese Prime Minister may call a snap election in December. Much like most developed economy leaders, Shinzo Abe’s approval ratings have been slipping for a while now and a snap election may guarantee another term as PM while the local opposition is disorganised.
Dollar has also moved higher on a shade of increased yield support as the yield on the ten year bond ran to 2.37% following a letter from the San Francisco Fed that said that many members of the FOMC may have overemphasised the effect of weak growth on dampening down interest rates in the future.
Elsewhere, markets were fairly relaxed yesterday outside of goings on in Russia. The Russian Central Bank is now a step closer to a free floating currency after abolishing its dual currency peg versus the USD and EUR. Previously the Bank had managed the currency round a representative value of both currencies but will now only intervene in case of “threats to financial stability”. RUB has gained around 2.5% on the announcement. It remains close to record lows versus the euro, dollar and pound.
While we are on intervention, it looks like we could see the Swiss National Bank have to take action on its currency soon to protect its 1.20 floor in EUR/CHF. Weakness in the European single currency has dragged the pair continually lower through the year. Recently, the Swiss National Bank President fired a shot across the bows of those who believe that the SNB will flinch on its policy of weakening the Swiss franc. President Thomas Jordan said the Bank has the ability to supplement its cap “immediately” should it feel it threatened. We think the SNB will cut rates into negative territory if recent deflationary pressures are sustained. There is no reason to suggest that they won’t given import price shifts from the Eurozone.
We still have a constructive view on GBP/CHF – it is essentially GBP/EUR with a free bet on intervention. EUR/CHF has opened at 1.2025.
Ahead of tomorrow’s inflation report, sterling remains very much in focus. I put out a full preview in yesterday’s Sterling Update and I remain balanced towards sterling weakness from the report’s publication.
