There are three highlights to the foreign exchange market today. First,
the yen is marginally softer. The yen's strength this month has been the
main development. After making a marginal new high yesterday, some semblance
of stability emerged in North America yesterday, and this has carried over into
today's activity.
The greenback largely held above JPY107.90 and rose to JPY108.40 in late
Asia. It has been consolidating in the European morning.
Japan's Finance Minister appeared to ratchet up the rhetoric a notch, warning that if the moves are extreme and
one-sided, officials will take action. Yet the fact that there has been no material intervention would imply the Finance Minister's
conditions have not been met.
This is important. Many
who have stressed the "currency war" narrative have been warning
since at least mid-February that BOJ intervention was a growing
risk. The fact that there has
been no intervention seems to support our contention, which the arms control agreement, not to use the foreign exchange
market for competitive advantage, remains intact.
Officials are in Washington DC for the IMF and World Bank meetings.
This could be a potential forum to
coordinate intervention, but we continue to argue that the bar to intervention
is high. There seems to be little reason to expect the US to agree to
dollar-buying intervention. Similarly,
there is no reason to expect the ECB to agree on euro buying
intervention.
The yen's strength coupled with disappointing inflation data may raise
the risk of additional easing by the BOJ later this month. The poor
reaction to the unexpected easing--adoption of negative rates--at the end of
January, may give BOJ officials cause to pause and reevaluate their tools and
tactics.
We note that the initial yen rally in the first half of February
exhausted itself, and the dollar-yen traded broadly sideways from mid-February
through late-March. The recent leg up by the yen at the start of the
month may be a combination of seasonal pressures and speculative
attention. The seasonal pressure seems to be ebbing and, as we noted,
over the last two weeks, speculators in the futures market have added to both
long and short positions.
The second highlight in the foreign exchange market today is the
extension of sterling's recovery. It began yesterday with a bout of
short-covering, but the extension today was sparked by higher than expected inflation.
Consumer prices rose 0.4% in March, lifting the year-over-year
rate to 0.5%, the highest since the end of 2014. CPI stood at 0.3% in
February. Core prices rose to 1.5% from 1.2%, the most since October
2014. The median forecast from the Bloomberg survey was 1.3%.
The details warn that the headline may have been flattered by the early
Easter and other base effects. Airfare, for example for 23% in March compared with a 2.2% increase in March 2015.
Footwear rose 1% after falling in March last year. Separately food prices
fell, and petrol rose less than a year
ago. Nevertheless, it does appear that inflation in the UK has
bottomed. Service prices rose 2.8% year-over-year
while goods prices are off 1.6%. The weakness in sterling may spillover
and underpin prices in the goods sector going forward.
The fact that sterling rallied on
the would seem to undermine explanations offered in some quarters that the
yen's rise and/or the dollar's decline
reflect investors focusing on real rather than nominal rates. The
Bank of England meets later this week. Policy remains steady.
Brexit risks loom on the horizon, and the economy appears to have lost some
momentum.
Sterling has been mostly confined
to a $1.40-$1.45 range since early March. We suspect that those who
are concerned about Brexit risks are content to be patient and look for better
levels to sell sterling. We expect the upper end of this range to
hold.
The third development in the foreign exchange market is the continued
strength of the dollar-bloc currencies. The firmer commodity prices,
including oil prices, and ideas that China's economy is stabilizing are helping
to underpin the Antipodean currencies and the Canadian dollar. Moreover,
some recent domestic data have also been favorable.
Canada reported a strong employment report last week. The
Bank of Canada could raise its GDP outlook when it meets later this week, and
with the help of a more stimulative fiscal stance, the output gap could close
earlier than it had previously projected.
A business survey in Australia,
reported earlier today, was better than expected. Later this week,
Australia will report the March employment data. Another constructive
report is expected. The risk of a
rate cut next month may ebb, though the Australian dollar's strength may
frustrate policymakers, who fear that the
market may be tightening financial conditions prematurely.
After pulling back in early April,
the Australian dollar has recovered smartly over the past threes sessions.
It is testing the $0.7670 area, after peaking near $0.7725 in late March. For its part,
the Canadian dollar has taken out its late-March high to rise to its best level
since mid-October 2015.
The US
session features import prices, where the risk is on the upside after a 0.3%
decline in February. Three regional Fed presidents speak (Harker, Williams,
and Lacker). The brief flirtation the
market had with an April hike has faded. We continue to argue that the clearest
signals of the Fed’s intent come from the leadership, Yellen, Fischer, and
Dudley. Interest rates differentials
are moving slowly back into the US favor, and we expect this to begin giving
the dollar better traction.
Higher Inflation Lifts Sterling, Yen Stabilizes
Reviewed by Marc Chandler
on
April 12, 2016
Rating:
Reviewed by Marc Chandler
on
April 12, 2016
Rating:
