There was a G20 over the weekend, a meeting of which little was expected, but one at which the US and even the Eurozone had the opportunity to complain about the sharp weakening of the Japanese currency, but failed to do so. This could be seen as a green light for further JPY weakening, though I suspect the most important factors for whether the JPY weakening picks up again immediately remain first, the direction of rates and second, the direction of risk appetite.
The USD/JPY consolidation has been very orderly, in any case, as Friday’s sharp reversal has failed to yield to any downside follow through yet. A local line of support has developed in USD/JPY above 108.50.
Interestingly, a former Bank of Japan deputy governor Iwata (not to be confused with a different current deputy governor Iwata) was out saying that the weak JPY puts Japan at a recession risk due to “beggar thyself” policy of Abenomics.
The New Zealand election resulted in few ripples and no change in leadership, an event that was met with little reaction, though NZD survived the Asian open better than AUD, which is tumbling on fresh pressure on commodity prices, as the bottom dropped out of silver late Friday and into this morning. Gold is not far from the cycle lows below 1200, so AUD traders should be on the lookout for commodity sentiment near these levels. Chart: GBP/USD Paying attention to the pivot. GBP/USD reversed hard on Friday after a bit of euphoria once the Scottish independence referendum No was registered. Since then it is trying to find a new equilibrium. Today’s pivot at 1.6366 has so far held the pair from a further bounce, though the 1.6400/25 zone is the more important resistance area if the USD dips a bit further today. As long as resistance remains in place, the bears will focus on 1.6200 and lower here in the near term.
Looking ahead Look out for the US Fed’s Dudley, Fed vice chairman, and permanent Federal Open Market Committee voting member as the head of the NY Fed, as he will be interviewed by Bloomberg later today. He is one of the “anchoring doves” keeping market assumptions on the dovish side of the median FOMC forecasts for policy, together with Janet Yellen and the new Board of Governor member Stanley Fischer.
Tonight, watch for the Chinese HSBC flash September manufacturing survey, which drooped to 50.2 in August. A reading significantly below 50 will have fresh China worries swirling, though these have been in the background all year anyway.
Otherwise, the USD rally remains fully intact and my next question for the currency market is what happens in the event of a sell-off in risky assets – would that halt the JPY slide, has the USD rally become a risk-on trade, etc? My suspicion is that risk off would see emerging market currency volatility, surprisingly muted of late, springing to life and the most pressure on the smaller G10 currencies, with the euro possibly rallying sharply as carry traders run for the exits.
It could also mean a sharp reversal in the JPY crosses, something that is looking increasingly at risk after Friday’s action in the likes of GBP/JPY and AUD/JPY. On the fundamental front, we’ll be taking Europe’s economic temperature this week with the preliminary PMI data for September up tomorrow morning and the latest German IFO reading on Wednesday.
The US data calendar is thin again this week, with Markit’s preliminary PMI readings for September up on Thursday and the most recent revision of Q2 GDP (can we really continue to react to these as we are about to enter Q4?) up on Friday.
Economic Data Highlights
New Zealand Q3 Westpac Consumer Confidence fell to 116.7 vs. 121.2 in Q2
Upcoming Economic Calendar Highlights (all times GMT)
Eurozone Bundesbank releases monthly report (1000)
Eurozone ECB’s Praet to Speak (1030)
Eurozone ECB’s Draghi to Speak before EU Parliamentary Committee (1300)
US Aug. Existing Home Sales (1400)
Eurozone Sep. Consumer Confidence (1400)
US Fed’s Dudley to Speak (1405)
US Fed’s Kocherlakota to Speak (2330)
China Sep. HSBC Manufacturing PMI (0145)