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JPY And Risk Appetite Decoupling?

Published 11/20/2014, 05:44 AM
Updated 03/19/2019, 04:00 AM


JPY crosses largely continued their ascent yesterday and overnight, with USDJPY notching new highs for the cycle close to 119 as of this writing and interestingly, doing so without a coinciding move higher in equity indices in Japan or in the US. Let’s see if this persists, but this is one of the more interesting divergences from “normal behaviour” of late, and suggests that extreme JPY weakening might be possible with or without a rally in risk appetite.

The Federal Open Market Committee minutes last night were rather USD supportive. There was a knee-jerk (likely algo-driven) selloff related to the initial headline from the minutes on the Fed needing to watch for declines in inflation expectations, but other aspects of the minutes were supportive, including the call by “some” to remove the “considerable time” language to describe the wait until the Fed’s first rate hike. Also, there was no mention of October’s financial market turmoil, a rather loud silence that I consider hawkish.

The Fed said nothing about October's market maelstrom and that's hawkish. Photo: Allison Joyce
The preliminary HSBC manufacturing PMI for China overnight came out exactly at 50.0, thus suggesting neither growth nor contraction. This is the lowest reading since May of this year as Xi Jinping apparently remains willing to let the air out of the warped Chinese economy. The price of iron ore is another reflection of this, and it notched new lows for the cycle yesterday, at about half of the price of its highest levels in 2013, adding further fundamental pressure on AUD, which has been weak across the board and not even able to post new highs for the cycle against the Japanese yen overnight.

Chart: EURAUD
JPY crosses are grabbing all the headlines, but we have an interesting development in many of the euro crosses as well, as the market is perhaps fretting the ability of the European Central Bank to effect the balance sheet expansion it would like to accomplish with its existing programmes. Note the rallies in EURAUD, EURNOK and even EURNZD. And note that EURAUD is pushing on an important resistance level, the 200-day moving average.
EURAUD Source: Bloomberg, Saxobank
Japan’s export numbers showed strong growth – with a 9.6% jump in October relative to a year ago and the strongest in years. This saw an improvement in the non-adjusted trade balance numbers to the smallest deficit since June of last year, an improvement that is exactly what central bank governor Kuroda and company have been hoping for. Again, this also means that the clock is ticking louder than ever for a Chinese response to Japan’s aggressive move to import inflation and demand.
New polls on the “Save our Swiss gold” referendum in Switzerland, to be held on November 30, saw a tiny rally in EURCHF, but this faded quickly.

Looking ahead
The preliminary Eurozone November PMI readings are up first thing this morning – the market isn’t ready for strong news – but this may be felt more in the likes of euro/smalls rather than EUR/USD if we do get strong readings.

Norway’s GDP number is on tap and can certainly move the market after EURNOK rallied again above 8.50 late yesterday, though keep in mind that at the end of Q3, the Brent crude price was still 95 dollars a barrel, versus 78 dollars now, and the average price over the course of Q3 was north of 100 dollars/barrel. A downside GDP surprise would look particularly ugly, therefore, as Q4 can’t have improved after the enormous drop in the oil price.

Also later we have UK retail sales, which might offer GBPUSD bears a fresh chance to get short at better levels if they are stronger than expected (strong UK retail sales don’t improve UK fundamentals in my book.)

Finally, the calendar highlight of the day is the US CPI number in early US hours. The best outcome for the USD would be a higher than expected reading for the core number, but let’s see how the market reacts – the Fed for its part has stated fairly explicitly that it doesn’t expect low inflation numbers in the near term to represent a strong risk to the outlook. Stay careful out there….

Economic Data Highlights

  • Japan Nov. flash Markit/JMMA Manufacturing PMI out at 52.1 vs. 52.7 expected and 52.4 in Oct.
  • China Nov. flash HSBC Manufacturing PMI out at 50.0 vs. 50.2 expected and 50.4 in Oct.

Upcoming Economic Calendar Highlights (all times GMT)

  • France Nov. Preliminary Markit Manufacturing and Services PMI (0800)
  • Germany Nov. Preliminary Markit/BME Manufacturing PMI (0830)
  • Germany Nov. Preliminary Markit Services PMI (0830)
  • Norway Q3 GDP (0900)
  • Euro Zone Nov. Preliminary Markit Service sna dManufacturing PMI (0900)
  • UK Oct. Retail Sales (0930)
  • UK Nov. CBI Trends Total Orders and Selling Prices (1100)
  • US Oct. CPI (1330)
  • US Weekly Initial Jobless Claims (1330)
  • Sweden Riksbank’s Floden to Speak (1400)
  • Euro Zone ECB’s Mersch to Speak (1430)
  • US Nov. Preliminary Markit Manufacturing PMI (1445)
  • US Oct. Existing Home Sales (1500)
  • US Nov. Philadelphia Fed Survey (1500)
  • Euro zone Nov. Consumer Confidence (1500)
  • Switzerland SNB’s Zurbrugg to Speak (1730)

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