Yen still going great guns
Friday’s markets remained quiet into the New York close with the bloodletting of positions versus the yen and the euro starting to ease, at least in the short term. That is not to say that we expect yen strength to abate any time soon; the dynamics that have driven the Japanese currency this far have yet to be addressed and policy intervention is still very much expected but not immediate.
Dollar could rebound handily
That being said, we are of the belief that the recent weakness in the US dollar should be coming to an end. While haven currencies such as the JPY and CHF may continue their recent strength against the greenback, I think that we are in a position where global risks and uncertainty – stemming from slowing economic growth, political tail risks and extraordinary monetary policy responses – are likely to see the USD remain a favoured asset.
Data this week from the States, namely Thursday’s inflation numbers are crucial. If prices rise by 0.2% on the month and the core component shows a similar level of strength then we are looking at an annual inflation measure above the Fed’s 2% target. That is not to say that rates should be driven higher now, but for a market that is not even pricing in a single rate rise this year, a good number on Thursday may point to a repricing of the USD into stronger territory.
The dollar is once again lower this morning following a continued pick up in oil prices. This upcoming Sunday sees OPEC meet, with rumours and market sentiment suggesting that a possible output cut could be voted for. Oil and other commodity prices leapt higher, dragging those currencies that benefit from terms of trade with these assets higher as well.
Bank of England to stay dull
Thursday also sees this month’s Bank of England meeting and we are looking for another dull policy decision and statement. A softening of the UK’s data picture has been evident since the beginning of the year and nothing has changed since the March decision. Any deviation from the Bank’s 9-0 consensus of holding both rates and asset purchases at current levels would be a major surprise and although MPC Member Vlieghe has hinted at the merits of negative interest rates in the past, this is not the time for them.
A referendum vote that upsets the apple cart may be of course and this Friday sees the official campaigns begin. That’s right, from this week until June 23rd – roughly 10 weeks – you are not going to be able to move for letters, leaflets, posters, billboards, adverts and vox pops about the EU referendum.
I am still unsure as to how the witch hunt over PM Cameron’s tax affairs affect the voting, if at all, but one has to feel that anything that upsets and increases the distrust against the de facto ‘political engine’ could drive voters into the arms of the Brexiteers. I am still of the belief that we vote to stay but a change of tack is needed by those leading the Remain camp if we do not want to wake up on June 24th having sleep walked into something that we never really wanted.
Inflation due this week but nothing today
Today’s data calendar is quiet ahead of inflation numbers from Germany and the UK tomorrow, Japan on Wednesday and Italy and the US on Thursday.