Can it Be? Commodity Dollars and JPY Weak on the Same Day?

Today we have the odd spectacle of the weak commodity currencies and a weak Japanese yen – a spectacle that is unlikely to continue in the near term. Which currencies to win the race to the bottom?

The market’s satisfaction with the Greek bailout deal remained in evidence as the Euro’s resilience continued today, with the single currency only falling a bit versus the dollar and a bit more against the G-10’s strongest currency on the day, the Norwegian krone, which has long been woefully mispriced relative to other commodity currencies and is not behaving like one. Note that EUR/NOK has dropped below 7.50 again today and hasn’t closed below that level on a weekly basis since 2003.

Elsewhere, the commodity dollars took a relative beating, with USD/CAD poking its head back above parity and AUD/USD unable to maintain the 1.0650+ range as of this writing, while the kiwi was beating the hastiest retreat of the three. USD/CAD downside momentum has left the building and we only need a pull through the 1.0050/75 area to raise expectations of a further rally back into the old range toward 1.0400.

GBP takes it on the chin after BoE minutes
GBP fell very sharply after the BoE minutes, which revealed that two members voted for a larger increase of £75 billion to the asset purchase target. But the reaction to the minutes appeared larger than any real developments (others were in favour of no new easing, for example), and may have been a result of large short positioning in EURGBP, which squirted well above the well-established range high at 0.8400 today. GBPUSD was likewise affected as that pair jumped ship (see more below).

Chart: GBP/USD
Sterling suffered a massive sell-off today in the wake of the BoE minutes, helping to confirm the recent double top in GBPUSD and the importance of the 200-day moving average (black) resistance. The focus now shifts to the 55-day moving average (red) and flat-line support in the 1.5600/50 zone.
GBP/USD" title="GBP/USD" width="652" height="478">
USD/JPY above 80
USDJPY rose further and took out the psychologically and technically significant 80 level today. The news driving the latest JPY weakness were further statements from the BoJ’s Shirakawa on the commitment to end deflation and the comment to parliament that the specific inflation target was publicized to show the BoJ’s resolve. Also possibly driving the JPY weaker were comments from former BoJ deputy Mota (considered a likely Shirakawa successor) fretting the possibility of capital outflows if Japan fails to shore up its finances and that it “is common sense that huge [Japanese government] bond issuances aren’t sustainable” and risk pushing bond yields higher.

Counting the USD/JPY rally
An interesting note on the persistence of the recent USDJPY rally – today was the 12th day out of 14 in which the pair has risen from the previous day’s close (Note that this is according to the data most readily accessible by me from Bloomberg, for which the trading day closes at 1800 GMT) only the fifth time this has happened since January 1, 2000. There were no instances of 13 up-days out of 14 during the last 12 years. A casual inspection of all instances and clusters of USDJPY rallies in which the pair have rallied in 10 or more days out of 14 over the last several years shows that in the vast majority of cases, the pair’s advances at least slowed and consolidated for a time after such a persistent move.

Weaker Euro Zone survey data
After a recent bounce in many of the Euro Zone economic numbers over the last month or more, the preliminary February activity surveys showed weakness, with Germany barely steering clear of a contraction in its manufacturing sector, while the Euro Zone as a whole apparently remains on recessionary footing in manufacturing and even dipped back into recessionary territory for the services sector as well. Not prominently mentioned, but likely a key factor in early February was the bitterly cold weather, so we’ll have to wait for March data for a better sense of the trajectory.

Looking ahead
The next big test for this market, which has been terminally focused on celebrating central bank liquidity since last December, will be next week’s ECB LTRO (Feb 28th and 29th), with its size seen as a key indicator on how much liquidity remains in the pipeline.

As for the latest extension to the JPY weakness, it is hard to imagine it continuing in the nearest term, particularly against the higher beta, pro-risk currencies, but even against the Euro and USD, if bond yields fall again. Yes, longer term the Japanese debt time-bomb fuse continues to burn, but we would need firmer signs of a dislocation in the bond market to believe that the time is now for a disorderly JPY retreat.

Tomorrow we have Germany’s IFO and the latest weekly US jobless claims and Bloomberg Consumer Comfort survey results.