Yen and Sterling Day

The US dollar has slumped to a new three month low against the Japanese yen, pushing convincingly through the 200-day moving average (~JPY101.25) for the first time since last November. It has not sustained such a break since before run-up to Abe's re-election as Prime Minister in late 2012. There appear to be two main drivers.

First, the softness in US Treasury yields (and core bond yields more generally) reduces the appeal of those investments for Japanese investors and other parties using the yen as a financing currency to buy core bonds.

Second, BOJ's Kuroda is not giving any quarter to speculation that the BOJ is seriously considering boosting its asset purchase scheme any time soon. News wires surveys showed as much as 70% expected new easing measures by the end of July. The BOJ left policy on hold, of course, today and upgraded its assessment of capex. Kuroda also repeated his argument that the labor market is improving in Japan.

Separately, Japan reported a smaller trade deficit, boosted by a 5.1% rise in exports and a 3.4% rise in imports. However, the shortfall of JPY809 bln was still about a third larger than the consensus forecast, even though its represents almost an 8% improvement from a year ago. Japanese officials had hoped that re-starting a few nuclear plants this year would also take some pressure off the energy imports. However, this was dealt a setback today as a district court delivered an injunction against Kansai Electric re-starting a nuclear facility despite passing a regulatory inspection.

We note that the gross short speculative yen positions in the CME futures market have been halved this year to about 80k contracts this year. The shorts have grown increasing frustrated by the lack of satisfaction and the persistent decline the US bond yields. There is now increased talk that a move below JPY100 is needed attract new dollar buyers. The 2014 dollar low was set near JPY100.75 in early February. The dollar has approached this area. Previous support in the JPY101.20-40 area should now offer resistance. The euro is also breaking down against the yen and is at three month lows near JPY138.25. The year's low was recorded near JPY136.25, which is the next obvious chart point.

Sterling is the other big mover today. The combination of stronger retail sales (three times stronger than expected) and BOE minutes that showed some officials see a case for a rate hike getting stronger, lifted sterling. It was pushed to almost $1.6925 before the buying enthusiasm eased. UK interest rates rose as well as the effect of the more dovish Quarterly Inflation Report from last week fades.

April retail sales jumped 1.3%. The Bloomberg consensus called for a 0.4% increase. The March series was revised to 0.5% from 0.1%. The year-over-year rate increased to 6.9% from 4.8% (that was revised from 4.2%) and is largest increase in a decade. The consensus was for 5.1%. It puts the start of Q2 on strong footing. Demand for household goods and discounts on food items were cited by ONS. The retail sales deflator fell 0.3% in April for a 0.6% year-over-year pace.

The MPC minutes seemed somewhat more hawkish than what is expected from the Federal Reserve minutes to be released later today. The housing market is a greater concern in the UK than in the US. Carney has suggested addressing it will fall more to the Financial Policy Committee, which meets next month, while Bean, who steps down next month, seemed to suggest a MPC response (rate hike). Note, reports suggest that a UK bank have announced a tightening of mortgage lending standards by capping loan amounts to four times income on purchases more than GBP500k. As Carney has acknowledged, the strong foreign bid is relatively immune from such requirements, largely paying cash. Lastly, we note Bean’s warning that the low volatility that the capital markets are generally experiencing preceded the financial crisis.

Sterling is set to extend its advancing streak (NY close basis) for the fifth consecutive session today. Support now is seen near $1.6840-60. On the top side, the $1.70 psychological level beckons, but appears to be too far today. Short-term technical indicators warn that sterling may be a bit stretched, and some consolidation is now likely. For its parts, the euro slipped to almost GBP0.8100, which is a new low since early 2013. It too is a bit stretched from a short-term technical perspective. Resistance is seen near GBP0.8130. The next downside target is seen near GBP0.8080.

The FOMC minutes are the main economic event of the North American session today. Before the minutes though, several Fed officials will be speaking. We assume Yellen and Dudley's economic assessment are similar. The contrast today will be between the more hawkish George and the more dovish Kocherlakota. Methodologically, we give greater weight to Yellen and Dudley than the other Fed officials and soon we expect to add Stanley Fischer to that pair. 

The more important aspect of the minutes will be an evolving discussion about an exit strategy after QE winds down later this year. Recall just prior to the April FOMC meeting, the Federal Reserve Board met to discuss "Medium-Term Monetary Policy Issues." Dudley suggested yesterday that it may still make sense to reinvest funds from the mortgage portfolio for longer, even after the initial rate increases.