Japanese Yen to Gain as Carry Trades Follow Stocks Lower
Written by Ilya Spivak, Currency AnalystFundamental Bias for Japanese Yen: Bullish
- Annual Corporate Goods Prices Fall by Most on Record
- Current Account Surplus Swells as Imports Tumble 43.9%
- Merchant Sentiment Rises to Highest in Nearly 3 Years
The Japanese Yen looks poised to advance in the week ahead as risky assets reverse lower, prompting liquidation of carry trades funded in the perennially low-yielding currency. Earnings season is upon us, and stocks look increasingly shaky having ended June trading at the highest level relative to earnings since 2004, a year when the world economy grew 4.1% in real terms. The OECD, IMF, World Bank, and all major central banks are in agreement that the world economy will shrink this year, suggesting the markets have been more than a little overzealous and need only a little nudge from some disappointing second-quarter profit figures to topple over. Stand-by yield-seeking trades like GBPJPY and all of the Japanese unit’s pairings with commodity-linked currencies are on average over 91% correlated with the MSCI World Stock Index, meaning that any return to risk aversion is likely prompt sharp carry-trade liquidation and boost the Yen.
Turning to the economic calendar, the modest helping of scheduled releases is unlikely to provoke much of a reaction from the market considering traders have probably priced in the underlying themes behind the likely data outcomes long ago. Consumer confidence will likely tick up for the sixth consecutive month in June, mirroring recent improvements in the Eco Watchers and Tankan Survey measures of merchant and business sentiment as the government’s record-breaking 25 trillion yen fiscal package continues to work its way into the broad economy. The same is likely to be the case with May’s Tertiary Index of service demand: the metric rebounded from a record low in April as government handouts helped support consumers’ purchases of services and more of the same seems plausible. Clearly, the important question going forward is whether such improvements are sustainable after the flow of stimulus cash dries up. The Bank of Japan seems pessimistic on this front, noting that consumption is likely to remain weak as the “employment and income situation becomes increasingly severe.” Indeed, the jobless rate rose to the highest in over 5 years in May as the economy shed 440k jobs. Still, near-term stabilization is welcome if only in delaying the need for further stimulative action, bringing Japan closer to an eventual recovery in overseas demand that will ultimately feed a rebound in the world’s second-largest economy. This means the upcoming monetary policy announcement is likely to be a non-event once more, with Maasaki Shirakawa and company saving any ammunition they may still have until they really need to use it.
British Pound Tied Up in Risk Ahead of the Advanced 2Q GDP Numbers
Written by John Kicklighter, Currency Strategist
As GBPUSD can attest to, the British pound was little moved against most of its major counterparts this past week. This is tranquility was somewhat unexpected considering the presence of the Bank of England’s rate decision and the G8 meeting. Both events seem to have had little immediate impact on the sterling; but be sure, they have had their influence on the fundamental currents underlying the price action.Fundamental Outlook for British Pound: Neutral
- The Bank of England holds rates at 0.50%, announces they will not expand its asset purchase program
- Factory activity contracts for the 20th month in two years; but consumer confidence hits an 8 month high
- G8 keeps the focus on recovery, dampens calls for government exit strategies
As GBPUSD can attest to, the British pound was little moved against most of its major counterparts this past week. This is tranquility was somewhat unexpected considering the presence of the Bank of England’s rate decision and the G8 meeting. Both events seem to have had little immediate impact on the sterling; but be sure, they have had their influence on the fundamental currents underlying the price action. The comments and decisions made this past week will no doubt surface often over the coming weeks and ultimately define speculation and trend. But, the trends will flounder without a catalyst to put the market in motion. There are a few notable economic releases over the coming week; but should we really expect them to finally force a breakout from GBPUSD and other range-bound sterling crosses?
Looking at the economic docket, it seems relatively light on market movers; but there is certainly fuel in the few indicators that populate the calendar. It is clear from a quick scan of the listing that event risk is heavily loaded to the front half of the week; and the last round of data due Wednesday is arguably the most influential. Employment is a critical factor in the United Kingdom’s eventual recovery from its worst recession since WWII. Market commentators often point to a rebound in credit activity and turn around in the housing sector as key steps to facilitating a broader economic recovery. However, both of these dynamics are dependent upon the health of the consumer. Brits require the means and confidence to put their money back into the economy and financial system. Employment is critical to both nationwide wealth and sentiment; yet the trend is hardly the beacon for a recovery that many seem so sure is under way. Through May, unemployment levels hit their highest levels since 1996. And, looking at forecasts for jobless claims, the this demographic is expected to grow. Another 40,000-plus contraction in payrolls would mark the 16th consecutive monthly contraction and no doubt push the 7.2 percent unemployment rate measured over the quarter through April higher.
Other releases for the week include two housing indicators. The DCLG price indicator is a lagging figure; but the RICS House Price Balance is a well-respected leading report. Economists are expecting this indicator to tick higher for the ninth consecutive month; but it is important to remember that the gauge has kept the housing sector deep underwater and has done so for nearly two years now. Retail sales on the other hand, measured by the BRC, has shown a positive shift recently. Though this is a proprietary gauge, it in some ways has greater clout as a consumer spending indicator than even the governments own retail sales report. Finally, the June inflation numbers will factor into monetary policy officials forecasts. Both deflation or rampant inflation would create major problems for navigating an economic recovery; and central bankers the world over are crossing their fingers that neither scenario develops.
This laundry list of indicators offers some foresight into where volatility may spring up; but for sterling traders, the real risk is in those catalysts that cannot be seen. Risk appetite is still the primary threat to the pound. The economy is still considered among most market participants to be the worst positioned, advanced economy. While a drop in confidence that a global rebound is imminent will do little to further degrade the UK’s position; a boost in optimism would certain leverage the sentiment surrounding the country. It is important to recall that this past week’s G8 meeting acknowledged the globe is showing tentative signs of economic improvement; but that conditions still warrant a focus on fiscal positions. With the United Kingdom already overextending itself in stimulus and aid, a call for all advanced economies to focus on recapitalizing banks and working off distressed debt means the second largest European economy won’t to have to shoulder a greater portion of the burden. Taken a step further, the BoE’s decision to hold QE at 125bln may signal the worst is past. -JK
Source : Dailyfx.com
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