Yen Soars Amid Stimulus Confusion and Doubts

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  • The strength of the Japanese yen is the main development in the foreign exchange market today
  • Sterling has managed to recover from the initial slide driven by dovish signals from MPC member Weale
  • The North American session features S&P Case-Shiller house prices for May the June new home sales reports
  • Fitch downgraded South Africa’s local currency rating by one notch to BBB- with a stable outlook
  • Brazil’s COPOM releases its minutes; Hungary’s central bank is expected to keep rates steady at 0.90%

The dollar is mostly weaker against the majors. The yen and the Antipodeans are outperforming while sterling and the Norwegian krone are underperforming. EM currencies are mostly firmer. SGD and KRW are outperforming while RUB and IDR are underperforming. MSCI Asia Pacific was up 0.4%, even with the Nikkei falling 1.4%. MSCI EM is up 0.1%, with Chinese markets up 1.2%. Euro Stoxx 600 is down 0.2% near midday, while S&P futures are pointing to a lower open. The 10-year UST yield is down 3 bp at 1.54%. Commodity prices are mostly lower, with oil down 1%, copper down nearly 1%, and gold up 0.5%.

The strength of the Japanese yen is the main development in the foreign exchange market today. It has gained nearly 1.5% as short-term participants grow skeptical of the kind of stimulus that had driven the yen around 7.5% lower between July 8 and July 21’s six-week high in dollar/yen. The pendulum of market sentiment has swung wildly.

One set of estimates had risen from JPY10 trillion to JPY30 trillion over that period. There was also the fascination with a version of helicopter money in which the Japanese government would issue non-marketable, perpetual zero coupon bonds that the BOJ would buy through newly created credits. Despite the illegality of such a policy, some observers seemed too hasty to shrug off Kuroda’s assessment because it was made in the middle of June.

In our discussions of the fiscal stimulus, we have emphasized the distinction between the inflated headline figure, puffed up by rolling up other programs and commitments, and the fresh water figure, which is the stripped down new news. We read yesterday’s report that the stimulus that was going to be JPY6 trillion instead of JPY3 trillion to be referring to the fresh water. Today’s comment by Finance Minister Aso that the size of the package, expected as early as next week, as not been decided yet only adds to the uncertainty and confusion.

The market seems less sure of what the BOJ will do at the end of this week. And even if one knew what the BOJ was going to do, there is not much confidence in anticipating the yen’s direction. We had thought there was room for disappointment with the BOJ. Of the three dimensions of its current policy, the quantity of assets being purchases, the quality of those assets, and interest rates, we had thought that increasing ETF purchases and perhaps some other risk assets might be the likely course.

The dollar fell to JPY104 in late-Asia before stabilizing. The 20-day moving average is found just below there, and the JPY103.75 corresponds to a 50% retracement of the bounce from JPY100 to JPY107.50. The 61.8% retracement is found near JPY102.85. Initial resistance is seen near JPY105 now.

Another feature of today’s foreign exchange market is the strength of the Antipodean currencies. The New Zealand dollar is up almost as much as the yen (~1.2%) and the Australian dollar (0.8%). The strength of the move is surprising given the fundamental outlook (both central banks are likely to cut interest rates next month) and positioning (speculators in the futures are long, especially the Australian dollar). First thing tomorrow in Sydney, Australia’s Q2 CPI will be reported. Barring a surprise, the report is seen as the last hurdle to a rate cut next week. And the market is even more convinced of an RBNZ cut later in the month.

The Australian dollar has been finding support near $0.7450 for the last several sessions, which is also at the intersection of a three-month uptrend. Its recent peak was about $0.7675 on July 15. The $0.7530 area that is probing in the European morning corresponds to a 38.2% retracement of that decline. The 50% mark is $0.7560.

In the heavier US dollar context, sterling has managed to recover from the initial slide to $1.3060. That slide was driven by news that MPC member Weale, who last week voiced some opposition to the dovish signals from Carney (and the minutes), said the flash PMIs convinced him of the need for immediate monetary support. Initial resistance is seen near $1.3160 and then $1.3220.

Tomorrow’s first estimate of UK Q2 GDP may only be interesting in passing. Despite some claims that the referendum was already having an impact in Q2, the economy may have actually accelerated a touch. More important may be Thursday’s house prices and business survey. Reports suggest prices of residential real estate in the London area have fallen sharply over the past month.

The euro is firm today after testing the $1.0950 area yesterday, which was the first session since early-March that the euro did not trade north of $1.10. Today it is, but not by much. It appeared to stall near the lower end of a band of resistance that extends from $1.1030 to $1.1060. The news stream is light, and the market is awaiting the stress test results at the end of the week.

The North American session features S&P Case-Shiller house prices for May, which are expected to have ticked up slightly and the June new home sales reports, where a small increase is anticipated after a 6% fall in May. The first estimate of Q2 GDP is out on July 29. The Bloomberg median of 2.6% is a little above the NY and Atlanta Feds’ GDP tracking models.

Barring a shocking Fed hike tomorrow, Q3 data is more important from a policy point of view than Q2 data. The Richmond July manufacturing survey hardly has heft, though we note that much stronger than expected recovery in the Dallas Fed manufacturing index yesterday plays on ideas that the US belt is basing for recovery. Markit’s preliminary service PMI for July is also on tap, along with the Conference Board’s measure of July‘s consumer confidence.

Fitch downgraded South Africa’s local currency rating by one notch to BBB- with a stable outlook. This moves it into line with its foreign currency rating. Fitch said it was part of a review applying new criteria. Last week, Fitch downgraded Colombia’s local currency rating under the new criteria as well. We have always felt that the local and foreign currency ratings should in general match up for every country, and welcome this move. In addition, this move is a clear reminder that sub-investment grade ratings are likely to be seen this year from at least one agency.

Brazil’s COPOM releases its minutes. At last week’s meeting, COPOM kept rates steady and maintained a very hawkish tone. Brazil also reports June current account data today. July IGP-M wholesale inflation and June central government budget data will be reported Thursday. June manufacturing PPI and June consolidated budget data will be reported Friday. This data should confirm the need for COPOM to remain cautious about cutting rates too early.

Hungary’s central bank is expected to keep rates steady at 0.90%. It has signaled that rates are on hold for now, but that further easing could be seen with unconventional measures. Deflation risks persist, and so we cannot rule out resumption in rate cuts too later this year.