USDJPY still the big driver
A week of no policy changes from those central banks taking the stage has rarely had such an impact with the Bank of Japan’s decision to hold off any new policy spending bringing a new tailwind to the Japanese yen and giving it the best start to the year since 1995.
The decision remains an interesting one for a few reasons; firstly we hope that the Bank of Japan has finally come to the tacit agreement that disinflation and deflation is a global issue and not one that Japan can solve alone and therefore, what good can a marginal cut in rates do for CPI?
Secondly, we must have to think that this will increase pressure on the Japanese government to increase their fiscal throughput in the coming quarters. Everyone agrees that help is needed, it is just from which quarter it comes.
Thirdly, this is not the last gasp of the Bank of Japan; power is still left in the fist, bullets in the gun. Nobody is quite sure as to what those bullets look like but interest rate guns remain the most likely weapon. They are simply being saved for a prolonged or sudden dip in output.
In the meantime the yen strengthens and the Bank of Japan must be praying for a Federal Reserve rate hike.
China reacts
Likewise in China, as a result of the rise of the yen the People’s Bank of China felt the need to strengthen the value of the yuan by 0.57% overnight – the largest single day rise since 2008. The movements have been mirrored in the offshore yuan and a higher value yuan may help stem the outflows from the mainland that have risen of late.
US growth disappoints
The dollar has spent the past 18hrs on the back foot following the initial release of Q1 GDP data that showed the slowest growth level in 2 years. Investment was the darkest spot with it and factory spending taking a hit as industries tied to oil and energy production struggled. The consumer couldn’t make up the difference despite the strength of the labour market, rising wages and low gasoline prices. Exports were slammed by dollar strength and weakness in those markets themselves.
We can foresee a bounce back; seasonally the first quarter has been weak for a few years although this is the first that has not seen large weather related or strike issues.
EUR/USD coming to the highs on France
The weak USD and strong GDP data from France means that, as we walk into the London office, EUR/USD is at the session highs. French GDP grew by 0.5% in Q1 with the wider Eurozone economy set to be shown to have grown by 0.4% in the first three months of the year. That alongside fresh inflation numbers will be released at 10am and could easily continue the run of single currency positivity.
The Day Ahead
The data picture for the day is rounded off by PCE from the US – the Fed’s preferred inflation measure with a slip in core prices likely to once again weigh on the greenback as we head into the long weekend.