Sterling and Yen Aren't Waiting for Tomorrow

The US dollar remains largely in a consolidative phase, awaiting Federal Reserve Chairman Bernanke's testimony before the Joint Economic Committee of Congress tomorrow. There has been much talk about tapering asset purchases and Bernanke's views are critical. 

However, comments by Japan's Amari, seemingly trying to soften yesterday's comments, after reportedly being criticized by cabinet colleagues helped lift the dollar back toward JPY103. Separately, soft UK inflation figures sent sterling back to the base it build last Friday and yesterday near $1.5165. Against the emerging market currencies, the greenback remains bid.

The BOJ's two-day meeting concludes tomorrow.  No fresh initiatives are expected.  The chief concern presently is the volatility of the government bond market--an unintended and seemingly unforeseen consequence of what it calls the qualitative and quantitative easing.  The yield on the 10-year JGB rose 3 bp and continues to flirt with the 90 bp level.  This compares with a yield of about 55 bp just before Kuroda announced the BOJ was going to buy 70% of the new issuance.  The backing up of long-term yields in Japan did not bring in new buyers at the 40-year auction earlier today.  The bid-cover was the lowest in almost 2 years.  

While the market does not expect the Federal Reserve to stop its $85 bln a month in asset purchases at once and, like the Fed itself, continues to mull an exit strategy, few consider the same in terms of Japan.  In some ways Amari's comments can be understood as tapping on the brakes, or blowing air under a parachute to help create the conditions of a soft landing to the yen.  The decline of the yen may be one of the factors contributing to destabilization of the government bond market.   A shortcoming of this interpretation is that it may attribute more intention and planning than may be the case. 

The speed of the dollar's recovery against the yen will likely embolden the yen shorts.  There is much talk of a JPY105 near-term target.  Yet for the North American session, the JPY102.80-JPY103 may provide the cap. 

The UK is one of the few high income countries in which measured inflation is still problematic. News that April inflation measures fell more than expected spurred ideas that guilt purchases may be resumed.  Gilts rallied and sterling came off.  April CPI slipped to 2.4% from 2.8% in March.  The market expected a 2.6% pace.  The drop in transportation and fuel prices accounted for almost half the improvement.  Still, the core rate fell to 2% from 2.4%.  

On the producer level, input prices fell more than expected (-2.3% vs consensus -1.3%) and this saw the year-over-year rate dip into negative territory (-0.1%) for the first time since last November.  Output price slipped 0.1% in April rather than rise 0.2% as the consensus expected.  This translates into a 1.1% year-over-year rise.  Core output prices are up 0.8% on a year-over-year basis.  

Separately, the UK reported the ONS house price measure rose 2.7% from a year ago.  This is the second fastest pace since December 2010. 

The minutes from the BOE's meeting earlier this month will be released tomorrow.  There had been some thought that the relative strength of the recent data and the desire not to pre-commit Carney could have prompted one of the three dissenters (which includes Governor King) may have defected.    Although the MPC did not know today's data when it made its decision, some observers now play down this possibility.

Sterling declined nearly a cent on the news, which has left the short-term technical indicators a bit stretched.  Good bids have been seen in the last three session near the $1.5165 area. Immediate resistance is pegged near $1.5220. 

The Australian dollar initially extended yesterday's upticks, but came off almost 2/3 a cent in Europe.  The RBA minutes were not surprising and give no reason not to expect further easing.  Yet the Australian dollar has fallen about 5.5% on a trade-weighted measure, tantamount to some degree of easing of monetary conditions and this might steady the RBA's hand next month.   In addition, the minutes did reveal that some members thought that the past rate cuts are still making their way through the system.    Near-term consolidation is the most likely scenario, awaiting tomorrow's busy session, with BOJ meeting, start of the EU summit, BOE minutes, Bernanke's testimony and FOMC minutes.