USD/JPY: Within A Whisker Of 100
GBP: Poised For Further Losses?
EUR: ECB Wants Inflation Back Up Near 2%
AUD: Hit By Weaker Business Confidence
NZD: House Price Growth Accelerates
CAD: China’s Reform Plans Disappointment
JPY: Steep Decline In Consumer Confidence
USD/JPY: Within A Whisker Of 100
With each passing day, USD/JPY is getting closer to the all-important 100 level. While there has been no major U.S. economic reports released, the gradual rise in Treasury yields has supported gains in the pair. The 3% rise in the Nikkei over the past 48 hours also helped to drive the currency pair higher and at this stage we believe its only a matter time before 100 is tested. However gains beyond 101 may be difficult to achieve without a clear commitment by the central bank to taper asset purchases before March 2014. With each 10bp rise in U.S. yields, the Federal Reserve’s reluctance to reduce asset purchases early increases because they know that less bond buying per month will drive yields even higher.
Until now, we’ve mostly heard support for earlier tapering from central bank officials including Dallas Fed President Fisher who called the recent job numbers not that bad and said monetary accommodation grows riskier by the day. While Fisher is not a voting member of the FOMC this year, his views should not be ignored because he votes in 2014. On the other hand, Fed President Kocherlakota who also votes next year expressed his concerns. Kocherlakota said the central bank is making slow progress on achieving their goals and tapering too soon would be a drag on the economy. He thinks the jobless rate threshold should be closer 5.5%, which clearly suggests that he opposes early tapering. Fed President Lockhart on the other hand believes the FOMC could consider QE taper in December. The improvements in data have certainly made December tapering a possibility but this will be Bernanke’s last meeting and he may choose to relegate such a significant change in policy to his successor. Hopefully we’ll get more clarity on monetary policy when Bernanke speaks Wednesday. His speech follows earlier comments from Fed President Pianalto. The following chart illustrates the strong correlation between USD/JPY (yellow line), U.S. 10-year bond yields (white line / blue area) and the Nikkei (green line).
USD/JPY; The Nikkei And The 10-Year Treasury" width="610" height="382">
GBP: Poised For Further Losses?
The British pound dropped to a 2-month low against the U.S. dollar after weaker than expected inflation reports. We did not expect the CPI report to have such a dramatic impact on sterling because it is not expected to change the Bank of England’s steady policy plans but apparently the currency pair was itching for a reason to fall. Consumer prices rose only 0.1% in the month of October, which would not be a big deal if not for the fact that annualized CPI growth slowed to 2.2% from 2.7%. Year over year core CPI growth also dropped from 2.2% to 1.7%. The decline can be attributed to 2 factors – slower tuition growth and weaker transport services inflation. The rest of the inflation reading was only slightly weaker than the previous month and it is for this reason that we believe investors were just itching for a reason to drive sterling lower. With the Bank of England set to release its updated CPI and GDP forecasts Wednesday, the decline in price pressures could affect the central bank’s tone on inflation. If their forecasts are revised down significantly, sterling could extend its losses quickly against the euro and U.S. dollar. While no expects the BoE to increase Quantitative Easing, improvements in economic data over the summer led investors to price in an earlier rate hike from the central bank. So the sell-off in the GBP reflects investors readjusting their rate hike expectations. Aside from the Quarterly Inflation Report, jobless claims are also scheduled for release and a sizeable decline is expected.
EUR: ECB Wants Inflation Back Up Near 2%
The euro continued to break away from other major currencies to trade higher against the U.S. dollar. The latest economic reports from Germany reinforce the European Central Bank’s decision to cut interest rates. Wholesale prices in the region’s largest economy dropped by the largest amount since June 2012. According to ECB members Asmussen and Nowotny, the central bank’s goal is to get inflation close to 2% from its current level of 0.7%. Friday euro zone industrial production figures are scheduled for release and given the steep decline in German and French industrial production there is downside risks to the report. However the EUR/USD refuses to fall despite its obvious disinflation and growth problems. As mentioned on Monday, investors haven’t given up on buying euros because they believe that the recent rate cut by the ECB is a one off move but if price pressures do not start to rise, the ECB may have to ease again. At the same time, many investors believe that the euro will benefit from long-term reserve diversification, which is a valid point but this is a long and not short term driver of euro flows. In the near term, U.S. yields are rising and we would be surprised if the EUR/USD will be able to ignore the move for much longer. We believe that the downtrend in the EUR/USD remains intact as long as the currency pair remains below 1.3550.
AUD: Hit By Weaker Business Confidence
The Australian, New Zealand and Canadian dollars extended their losses against the greenback. While house prices grew at a faster pace in New Zealand in the month of October, the business confidence index for Australia fell sharply from +12 in September to +5 in October. This steep decline in sentiment caught investors by surprise but is in line with the Reserve Bank’s cautious outlook. Last night, China ended its 4 Day Third Plenum and failed to live up to the market’s lofty expectations. Had China announced a grand sweeping reform plan that dazzled the markets, global equities would be performing better and high beta currencies such as the Australian and New Zealand dollars would have risen strongly. Unfortunately the government’s announcement was short on details, making investors worried about how much of the plan has been worked out. What we know is that the government hopes to show “decisive results” with their reforms by 2020. Their goal is to “straighten out the relationship between government and the market, allowing the market to play a decisive role in allocating resources and improving the government’s role.” The market was looking for specifics and China gave nothing more than generalities. The government promised general fiscal and financial reform as well as greater property rights and equal access to public services. Unfortunately everyone was hoping for specific changes to controls over interest rates and the flow of capital as well as land title and property rights for farmers. Economists were also looking for major reforms to state-owned enterprises but China only acknowledged the importance of both state and private companies. More details on their policy plans will be released in the coming days and hopefully China will finally deliver on their promises of grand sweeping reforms because a stronger China benefits the world.
JPY: Steep Decline In Consumer Confidence
It was a mixed day for the Japanese Yen. Despite the rise in USD/JPY, not all of the Yen crosses ended the day in positive territory. The problem was that the sell-off in the British pound and commodity currencies exceeded the rally in USD/JPY. The decline in Japanese consumer confidence in October also caught the market by surprise. The consumer confidence index dropped 4.2 points to 42.1, the steepest decline since the earthquake in 2011. A typhoon in mid-October could have contributed to the sour mood along with the prospect of a higher consumption tax next year. Last month, Prime Minister Abe officially confirmed that the sales tax will increase to 8% from 5% in April and while he simultaneously announced a 5 trillion yen stimulus package, he did not reduce corporate taxes. A decision on corporate taxes could still be made in December but the fact that it was not introduced in October may have contributed to the deterioration in sentiment. While the Japanese economy is expected to gain traction over the next few months, the drop in confidence could make it more difficult for Abe to achieve his growth and inflation targets. Nonetheless Japanese stocks shrugged off the data, rising more than 2% overnight.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.