NOK/JPY Overview and Outlook for 2012

The Norwegian krone has made an extremely impressive start to 2012. It was the top performing currency in February, which is largely due to a combination of domestic economic strength and soaring oil prices.
Amid worrying developments in Iran, the price of Brent crude oil is trading at what is more than a three year high of $126 per barrel, which represents a 15% climb since the start of the year. As a major producer of oil, the Norwegian economy stands to benefit and by association so too does its currency.

On a domestic level, Norwegian manufacturing and retail sector growth and declining unemployment has improved sentiment towards the NOK, while a widening trade surplus shows that its export sector is not being hit by the eurozone downturn as other economies are. The Norwegian economy grew by an impressive 0.6% in the fourth quarter of 2011 and forward looking surveys are pointing towards a quicker pace of growth in 2012. Amid rising investment in Norway’s oil and gas sector, growth seems firmly underpinned while other global economies face a very uncertain year. As such, Norway’s stable, AAA-rated economy has seen the krone take on the role of something of a safe-haven currency so far this year.

The only real question mark hanging over the Norwegian krone is the monetary policy of the Norges Bank. The state of Norwegian economic growth wouldn’t suggest the need for interest rate cuts but that is what we have seen this week. The Norges Bank has surprisingly followed its December rate cut of 0.50% with a further 0.25% cut. With the Norwegian base rate currently standing at 1.25%, the krone’s interest rate differential has clearly been heavily reduced. More significantly though, the move suggests that the Norges Bank is very concerned with the appreciation we have seen in the Norwegian krone. A further cut to the base rate this year cannot be discounted.

Despite the NOK’s minor sell-off in response to the Norges Bank’s move this week, NOK/JPY has climbed by over 14% from January’s lows of 12.65, to its current level of 14.45. High oil prices and strong growth are likely to sustain demand for the NOK moving forward. The Norges Bank’s discomfort with the krone’s appreciation will slow the pace of this pair’s climb (and regardless, it is highly unlikely that the yen can also maintain its current pace of depreciation). Nonetheless, NOK/JPY should see gains past 16.00 in the second half of this year.

Richard Driver
 
Currency Analyst
 
Caxton FX

EUR/JPY Overview: Japanese yen to continue weakening

The yen has weakened off by around 11.5% against the euro in the past two months. This is largely attributable to the convergence of performance between the US and Japan economies and monetary easing from the Bank of Japan.

The Japanese economy remains a key underperformer among the major global economies; it contracted by 0.2% in the final quarter of 2012 (though this was revised up from an initial estimate of a 0.6% contraction). Reduced exports, caused by the yen’s excessive strength and weakening global demand, are a key factor weighing on Japanese growth. However, industrial production and the post-earthquake reconstruction project is gaining pace, which should take Japanese back into positive territory this quarter.

The market was recently dealt a scare by January’s Japanese current account data, which revealed a record deficit of $5.41bn. The yen suffered as a result - Japan’s current account surplus has been a cornerstone of the JPY’s safe-haven status. Nonetheless, it remains likely that this deficit will prove a temporary blip, though it did the yen no favours in the short-term.

The US economy, by contrast, is outperforming. It grew at an annualised pace of 3.0% in the final quarter of 2011. As shown by the Non-Farm payrolls figures so far this year, the US labour market is making some real improvements. Crucially, this has seen the US Federal Reserve remove any reference to QE3 from its messages and in a statement this week, it upgraded its economic outlook from “modest growth” to “moderate growth.” With China slowing down, the eurozone entering a recession and Japanese growth likely to be fairly flat this year; the US economy is the real outperformer at present and we are seeing considerable yen to dollar flows as a result.

Another key factor weighing on the JPY is the Bank of Japan’s commitment to yen-depreciation. The strong yen has been a huge downside factor on Japanese exports. The Bank of Japan has repeatedly failed in its attempt s to directly intervene in the currency markets but monetary easing is still a weapon that the market is wary of.

February saw the BoJ boost its quantitative easing programme by 10 trillion yen, which has fuelled much of EUR/JPY’s gains in the past month. Whilst the BoJ took no further major action at its March meeting, the dissent within the committee highlights the scope for further easing. The Bank of Japan is highly concerned with the country’s deflation problem and is likely to continue monetary easing this year in order to achieve its 1.00% inflation target.

There are a plethora of reasons why not to invest in the euro this year. Having contracted by 0.2% last quarter, the eurozone’s growth figures in the year so far are pointing quite clearly to a recession. Nonetheless, there have been some broadly positive developments out of the eurozone in recent weeks, with the Greek debt-swap deal going through and paving the way for what is likely to be a second Greek bailout. However, sentiment towards the euro has been hit hard, as shown news by the 13.5% decline in the EUR/USD pair from last summer’s high.

Greece will be granted aid for now but it is widely expected to return to bailout territory by next year. Market sentiment remains suspicious that Portugal and more alarmingly Spain and Italy may be forced to follow a similar path in having to restructure their debt. The only real factor seemingly supporting the euro at present is the constant need of Asian and Middle Eastern central banks to diversify their FX reserves away from the US dollar.

Regardless of the eurozone’s poor growth and debt dynamics, monetary policy in Japan is likely to be the dominant driver of this pair in 2012 and EUR/JPY’s rise will not be a symptom of euro strength but of yen weakness. Long positions in the yen have fallen back considerably from January’s highs and we do not view the weakening bias we have seen in the yen in the past few to be temporary.

Developments in the eurozone and the US economy have provided a boost to global stocks, including the Nikkei, and in these risk-on conditions the safe-haven yen will always weaken. Events in the eurozone are likely to put plenty of pressure on market risk appetite this year but our bet is that the BoJ will successfully demonstrate its resolve in weakening the yen through monetary easing, something it failed to do through direct intervention.

We can see the EUR/JPY rate continuing its uptrend from the current 109.00 level in the coming months. This should see April 2011’s highs above the 120.00 level revisited at some point in the second half of this year.

Richard Driver
Currency Analyst
Caxton FX

Swiss National Bank Gets Aggressive

The SNB announced this morning that it intends to keep the EUR/CHF rate at a minimum of 1.20 - this is the 'floor' which it will be defending. This direct intervention in the currency market caused the swiss franc to understandably sell off sharply across the board in response.

With the SNB recently warning the Swiss public that they would have to endure a strong swiss franc for the foreseeable future, there has been some market scepticism towards the SNB’s genuine commitment/ability to limit the currency’s strength. The SNB’s announcement this morning referred to “utmost determination” to containing further CHF appreciation, and it has had the desired effect; the 1.20 target was achieved in a matter of minutes.

Central bank currency intervention has failed repeatedly; we have seen it in both the yen and the swiss franc. It can slow the pace of appreciation, but it does not reverse the trend. Could this time be different? The SNB definitely looks serious this time, claiming willingness to buy “unlimited quantities of foreign currency.” Whether it is successful or not, it is likely to cost the SNB hugely.

The EUR/CHF target rate of 1.20 will almost certainly be tested by speculators and ongoing safe-haven flows alike. Concerns surrounding global growth and eurozone debt are not going anywhere, so demand for safer assets like the swissie will persist. Nonetheless, in the short-term, you can expect the SNB to stick to their task. There could be some further major moves in the offing as well, as other central banks respond.

Knee-jerk moves saw the EUR/CHF gain by 8.5% and the GBP/CHF by almost 8.0%; these are major moves. The effects have been felt throughout the currency markets though; GBP/EUR has declined fairly sharply as investors get out of the swissie and into the single currency.

Richard Driver
Analyst – Caxton FX
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Can the Bank of Japan's curb the yen's strength?

The Japanese economy is in recession, it is still recovering from a devastating natural disaster, Japan’s interest rate is at rock bottom and what is more, Moody’s has just downgrades Japanese debt. So why has the Japanese yen strengthened to record levels in recent weeks and months?


The answer is simple: the yen’s safe-haven status. The past six months have thrown up a huge amount of uncertainty in the financial markets. The Japanese earthquake disrupted international trade patterns, oil prices are sky high, global growth has slowed down, the eurozone debt crisis threatens the global banking system, and the US has had its debt downgraded and could be heading into another recession.

What do investors do in this climate? Head out of riskier assets such as commodity-linked currencies and equities, and into traditional safe haven assets such as government bonds (such as UK or US, not Greek!), gold, and the yen and swiss franc. The fact that the Japanese economy is struggling matters not a jot, the yen’s safe-haven status trumps all.

Turmoil in the financial markets looks unlikely to let up any time soon; it will probably take months for a long-term solution to the eurozone debt crisis to emerge, not to mention the increasing likelihood of a US recession and further debt downgrade next year. So what can stop the yen from strengthening?

Certainly the Japanese government and the Bank of Japan are very uncomfortable with the yen at current levels. There has been much jawboning about intervention in the currency markets in order to weaken the yen. The Bank of Japan conducted some unilateral intervention on Aug 4th, injecting around $3bn into the Japanese economy. Going on the yen’s climb in the time that has passed, this was unsuccessful.

Japan has very recently announced a $100bn credit line to encourage domestic firms to sell yen and invest overseas. Japanese officials may be coming to terms with the fact that they cannot to disrupt the yen’s longer-term strengthening. Further intervention efforts can be expected however, if for no other reason than to slow the yen’s appreciation. 75 yen to the dollar may well be the next benchmark which triggers further action from the Bank of Japan.

Richard Driver
Senior Analyst – Caxton FX


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Japan’s earthquakes (Kobe 1994 and Tohoku 2011): the effect on yen

One month on from the Japanese natural disaster on March 11th, we saw this as an interesting opportunity to compare the currency market’s response with the earthquake that struck back in 1994.

On January 17th 1994, a 7.3 magnitude earthquake hit Kobe; killing over six thousand people and causing ten trillion yen worth of damage (amounting to roughly 2.5% of Japanese GDP). The yen proceeded to strengthen by 18% against the US dollar in the space of three months, before almost halving in value in the subsequent three years.

So how does this compare to yen’s response to this most recent disaster?

The Japanese currency did appreciate, but only by 5% against the greenback and in the space of just 5 days. This climb was reversed within the following five days as the world’s G7 Central Banks intervened to curb further yen appreciation. Since that date the yen has continued to steadily lose value as the market picks up on the lower growth potential and the expectation of rock bottom interest rates in Japan for some time to come. Indeed the yen is currently down at a 7-month low with further room to drop.

The natural market response (yen investment) in the wake of last month’s earthquake was cut well short by the unprecedented and prompt Central Bank intervention. In the current climate, the Bank of Japan is simply unwilling to allow its already weak economy to suffer the serious knock to its exports that a stronger yen would amount to. Obviously we are yet to find out whether the yen will devalue to the same extent as in the late 1990s, but the current forecast is for continued depreciation on the basis of weak fundamentals.

The USD/JPY rate currently sits at 85 yen. Forecasts 12 months out expect to see the US dollar reach 100, but the 144 level reached in 1998 does at this point seem very far-fetched, particularly as the Fed are hardly in a hurry to tighten monetary policy either.

Richard Driver
Analyst – Caxton FX


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Eurozone crisis still bubbling under the surface

The crisis in Japan is understandably dominating the headlines in the financial markets as the impact on the global economy is contemplated. Aside from this, the state of emergency in Bahrain is also providing reason for the markets to remain in a heightened state of nervousness. The country’s debt rating has been cut to BBB by Moody's and there remains the possibility of an Iranian militarily intervention if the protests escalate.

Although it’s not dictating market direction at present, bubbling under the surface (and surely soon to come back under the spotlight) remains the eurozone debt crisis.

After last weekend’s EU Summit, the markets responded positively to news that EU leaders agreed to expand the European Financial Stability Fund to €440bn euros, which will now have greater capacity to cope with further euro-area bailouts. But Trichet’s comments this week suggest that the markets may have got overexcited about the weekend’s early progress. Trichet dismissed the agreement as “insufficient” and it’s quite clear that in order to reach the “comprehensive package” there are some serious obstacles to be overcome. It remains to be seen whether the agreement can actually pass through the European Parliament and whether the populations of large eurozone countries, such as Germany and Austria, can be convinced to increase their financial commitments.

Portugal’s credit rating was downgraded by Moody’s yesterday, and the euro suffered accordingly. A Portuguese bailout seems on the cards and a Greek default is certainly probable in the coming months. Any perceptions of a new safe-haven currency in the form of the euro – as was seen in City AM this morning - are wholly misguided; the downside risks to the euro in coming months clearly outweigh its upside potential.

Richard Driver
Analyst – Caxton FX

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Japan announces a major round of quantitative easing: how will the yen fare in response?

Reacting to the devastating impact of the earthquake that struck on Friday, the Japanese central bank has announced its intention to pump a record ¥15tn into the economy ($183bn). This follows the reaction of the Reserve Bank of New Zealand to the earthquake that struck Christchurch, which opted to cut rates by 0.50%. With Japanese interest rates currently at next to nothing (<0.10%), the Bank of Japan clearly can’t follow suit, and has therefore opted to loosen monetary policy through flooding the money markets and buying government bonds.

The two countries’ approaches are alternative ways of achieving the same basic goals - to give consumers ‘a break’ in amid social upheaval and to provide support to fragile economic growth.

The so-called policy of quantitative easing that Japan has announced this morning invariably has the effect of weakening the economy’s national currency. The US Federal Reserve’s ‘QE II’ program has been responsible for the dollar’s woeful underperformance over the past year or so. Money-printing increases supply, thus weakening the currency as demand eases.

Accordingly, the yen declined against 13 of its 16 major counterparts as markets reacted to the news. However, just as the New Zealand Dollar did in the immediate aftermath of its rate cut last week, the yen has rebounded relatively strongly. There is a sense that New Zealand’s economy may eventually benefit from Christchurch’s disaster, with its construction sector in particular expected to enjoy strong growth. The same was thought of the Japanese construction sector but the apparent devastation suffered in the country’s north-eastern region seems set to provide a genuine setback to the Japanese economy in 2011. The country has suffered major damage to its infrastructure- most notably its roads and highways, factories and nuclear plants.

Fundamentally, we can be pretty confident of one thing- the yen will not strengthen this year. The Japanese government has this morning said as much. It threatened intervention to curb any sudden yen appreciation, asserting that it “will take decisive steps if necessary” (indeed the BOJ acted on their threat in September last year, though the impact was fleeting). So anyone hoping for a yen appreciation to mirror the aftermath of Japan’s last major earthquake in 1995 will be disappointed.

Behind the government statement is the concern that Japan is an export-dependent country which relies on weaker exchange rates particularly in times of low-growth. When a government makes this sort of statement, market appetite for the related currency is understandably dampened.

Will the yen decline? Well, the scale of the disaster is continually being revised up, and in light of this morning’s government statement, the yen could be set to weaken despite a thus far robust post-quake performance. In addition, we see risk appetite increasing over the course of 2011 and anticipate that funds held in yen will be redirected to higher-yielding, riskier currencies.

Richard Driver
Analyst – Caxton FX


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Tsunami hits Japan- how have the currency markets responded?

Japan has suffered from one its most powerful earthquakes for a century, unleashing a devastating tsunami across its northern coast. Today’s events follow last month’s earthquake in New Zealand, and January’s flooding in Australia. Japan represents the world’s third largest economy and the effects of this disaster are being felt throughout the global financial world.

The immediate response to the quake saw the Japanese yen fall across the board. This is understandable; it comes only two days after Japan announced that its economy slipped back into contraction last quarter. However, the market’s slightly longer-term response to the quake is somewhat counter-intuitive.

Since its initial dip, the yen has rebounded very strongly against all its counterparts as the markets. Why? The yen is one of the world’s few safe-haven currencies, which investors turn to in times of uncertainty. The earthquake may have occurred in Japan, but the global financial markets are intertwined and the widespread concern that has been triggered has seen the yen appreciate impressively. Market appetite for safety had already been heightened this week amid soaring oil prices, turmoil in the Middle East and North Africa, and eurozone debt concerns – this earthquake merely confirms this recent investor mindset. Accordingly, other safe-haven currencies such as the US dollar and the Swiss Franc have today strengthened against riskier assets such as the euro and sterling.

So will the yen continue to benefit from the earthquake? This will not be clear until the extent of the damage to the Japanese economy is ascertained. If Japan’s last major earthquake in 1995 is anything to go by, then the yen will continue to appreciate impressively. But the yen has heavily underperformed this year and with Japanese interest rates low and growth prospects poor, it will take prolonged risk aversion for this downwards trend to be reversed.

In other Caxton FX-related news, it was excellent to see fellow analyst Duncan Higgins quoted by Reuters today on his UK rate rise forecast.

Richard Driver
Analyst – Caxton FX


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Sterling is merely a spectator as the euro slumps against the US dollar

Despite worse than expected construction data from the UK, sterling has made gains against most of its major counterparts as it tracks the US dollar higher.

Positive employment data from the US and continuing fears about the eurozone debt crisis have sent the greenback higher with the pound hanging on to its coattails. A report showing that US companies created almost three times as many jobs in December than expected helped the US currency make its largest gains in almost three months. USD has recouped all losses made against the yen since new year’s eve and taken it back to pre-Christmas levels against the overinflated Swiss Franc.

Continuing issues in the eurozone will be the general theme for 2011 with a possible break-up of the single currency the most extreme prediction from some analysts (see this piece by Harry Wilson in The Telegraph). While this is unlikely, pressure from the stronger EU nations for a resolution could well lead to a state of greater fiscal union with Germany inevitably picking up the pieces.

Reading ‘Peston’s Picks’ from the BBC, I was interested to see his views on the Ipsos Mori survey published today. The survey outlines that FTSE 350 leaders are more upbeat about the start of 2011 than they were in 2010, despite heavy handed austerity measures. Mr Peston goes on to point out that despite muted optimism in early 2010, no one saw the collapse of Greece and Ireland (although according to this BBC piece his colleague James Robins, the BBC Diplomatic correspondent, did exactly that) . What will 2011 have in store for us?

In other news, further integration of China into the world economy took a leap forward as the World Bank has issued its first bond denominated in the Chinese yuan. The international lender could have plans afoot to make China its third largest stakeholder after the US and Japan.

And finally, pun’s about the state of the single currency reached fever pitch as Estonia has been enveloped into the EU’s economic bosom. Apparently, a cow in Tallinn, Estonia’s capital, offers an excellent exchange rate of one kroon to one euro, fifteen times better the actual exchange rate. Well, where there’s muck there’s brass! (sorry)
Tom Hampton
Analyst – Caxton FX
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G20 meeting this weekend

The market seems fairly stable today as investors are hesitant to take out positions ahead of this weekend’s G20 meeting between the world’s financial leaders.

The US is raising the stakes in calling for countries to avoid using their currencies to gain economic advantage. US Treasury Secretary Tim Geithner, in a letter to the G20 finance pointed out that ‘emerging economies with undervalued currencies and solid reserves must allow their currencies to adjust in line with fundamentals.’ Of course, every financial leader of emerging economies will be looking to poopoo this as a weaker currency makes their exports much more attractive.

Leaders of more developed economies will be looking to strike some kind of accord to secure this agreement in principle, however pushing it through will be a lot harder in practice. It is highly unlikely that a binding agreement will be reached this weekend as heads of the developing economies will protest about the ability of countries such as the US and the UK to structure huge bailout packages.

In other news, sterling’s decline continues as it faces a sixth straight week lower against the euro. With the downward pressure associated with that fateful phrase “quantitative easing” in the UK and US showing little signs of abating, this trend is set to continue at least ahead of the Fed’s Nov 3rd meeting. Maybe if the French can protest for long enough, the eurozone’s debt issues will take their rightful place at the fore of the market’s focus.

Have a good weekend!

Tom Hampton
Analyst – Caxton FX

Sterling’s intra-day rise and fall

Sterling had a fairly bullish morning to hit highs of €1.1809 and $1.5895, before taking a tumble against every one of its major counterparts after a member of the Monetary Policy Committee expressed his views for more quantitative easing.

The pounds rally began this morning as dollar selling continued after reported comments from a former Chinese central bank advisor said that a devaluation of the US currency was inevitable. The ascent gathered more momentum as the revised CBI (Core Business Index) figure showed consumer spending had risen sharply last month when a fall was expected. Positive results in the UK’s Current Account and last quarter’s GDP figure kept the upward trend going until................ BOOM! Adam Posen, a member of the MPC said “I think further monetary easing is needed.” He went on to outline that it should begin with additional gilt buying, before leading into full fiscal stimulus and corporate debt purchase to avoid a “Japanese style scenario.”

These bearish comments have since sent the UK currency to intraday lows of €1.1680 and $1.5722.

In other news, the euro continues its demolition of the US dollar to climb to a high of $1.3509, despite ongoing concerns over the health of the European banking industry (with Ireland the focus at present) and the eurozone’s ability to meet escalating sovereign debt.

Has Sterling bottomed out?

My screen is finally awash with green today as sterling pulls back some of its losses from the past few days against all of its major counterparts except the Swiss franc.

The pound is back up near €1.1750 against the euro having sunk to a four month low of €1.1672. Further doubt over the longevity of the European economic recovery spread as poor data showed growth in the eurozone slowed in September, causing peripheral bond yield spreads to widen against German counterparts. Against the greenback, the UK currency did creep above $1.57 earlier in the day. The dollar is continuing its fall from grace with concerns over further rounds of quantitative easing and yet more poor data showing that the amount of jobless claims unexpectedly rose last week.

Be warned, Sterling’s rebound could be a momentary correction as the pound was heavily sold on Wednesday. The UK economy remains extremely vulnerable as the BoE alluded to with the possibility of a fresh monetary injection.

In further news, I spent my morning at a seminar on foreign exchange trends, which was as interesting as it sounds.... The major themes to report for the middle to long term are;
A) A double dip recession (depending on your definition) looks an almost certainty for the US, UK and Europe, while Asia looks to be the engine house for the global economy.
B) The unstoppable ascent of the Swiss franc. The lack of support for the traditional safe US dollar has led risk averse investors to the franc and the Japanese yen. However, with the BoJ’s intervention to depress their currency, the Swissie has become the hedge of choice for many. Great internal economic fundamentals and global uncertainty in Q4 look set to send the franc higher.
C) Those of you looking for a higher-yielding asset may look to the Aussie dollar. Some analysts are saying that it is near the end of its run. However, with commodity prices at an all time high, insatiable demand from China and a high interest rate that is looking likely to be moved even higher, it has every potential.

Tom Hampton
Analyst Caxton FX

Sterling under pressure yet again

Against the euro, sterling remains at the lower end of its estimated range this month (between 1.19-1.2150) which is also near a seven week low after a raft of weak economic data confirmed a patchy UK recovery.

Bank of England data showed lending to UK businesses fell for the fifth straight month in July and data from Rightmove, also showed property asking prices in England and Wales fell for a third consecutive month in September.

Having had a relatively bullish few months after the general election, UK data seems to be softening as we move into what is going to be a very difficult Q4 globally. Fears are mounting over the looming austerity measures set out by the chancellor earlier this year and the damaging effects they could have on the UK economy next year.

In other news, despite the Bank of Japan and the Swiss central bank’s best efforts to de-value their respective currencies, they have both made considerable gains across the board. Could this prompt more severe reaction from both institutions?

Tom Hampton
Analyst-Caxton fx

Sterling rebounds from early losses

Sterling touched a seven week low against the euro and fell against the dollar after a surprise rise in claimant figures fed concerns over the UK economic outlook.
Data released this morning showed the number of people claiming unemployment benefit rose by 2,300 in August. It is the first rise since January and went against expectations of a fall of 4,100. The rise comes as public sector departments begin redundancy programmes ahead of this autumn’s spending review. The figures confirm that the UK recovery is still in the balance, and despite the persistently high level of inflation, the Bank of England remains poised to act if the recovery starts to waiver.
In other news, the Japanese yen has tumbled over 3% against both the US dollar and the pound after the Japanese government intervened by unilaterally selling the yen to curb gains that threaten the export-led recovery. This was the first time since 2004 that the government had intervened.

Sterling going for its second straight day of gains

Sterling is up against most of its major peers today with the dollar under pressure following yet more weak economic data, and the euro losing ground after Ireland suffered a credit rating downgrade from S&P.

The greenback lost ground following another round of disappointing housing figures for July as well as weaker than expected durable goods orders. In contrast to data from the peripheral eurozone countries, strong IFO figures from Germany gave the euro a brief lift. Positive CBI sales figures from the UK helped to send sterling higher.

In other news, the Japanese yen is losing more ground as speculation builds that the Japanese authorities will go beyond verbal intervention to curb the strength of the yen.

Sterling re-coups early losses

The UK currency was near a one month low against the dollar after yesterday’s stock market move downwards.


Positive data from Germany showing the Ifo index hit a three year high has given the euro and pound a much needed boost against the dollar. However, as we saw in yesterday’s trading, these gains are expected to be short lived as lingering worries about the US slowdown and EU debt worries will ultimately allow safe haven currencies to shine through.

Paradoxically, the Japanese yen has fallen against most of its major peers, including falling from a fifteen year high against the US dollar, on speculation the Bank of Japan will intervene to keep exports more attractive.

MPC member’s comments turn sterling to the downside

MPC newcomer Martin Weale said in an interview in the Times that the UK faces a ‘real risk’ of a double dip recession. Although this sentiment is nothing new after the BoE’s re-alignment of growth expectation earlier this month, its reiteration, thin summer trading volumes and the markets hunger for safe-haven investment have sent sterling down against most of its peers.


Recently, the demand for ‘refuge’ currencies has brought the pound down from a nine month high against the greenback, with the price now back down at $1.54 and talk in the market that this bear run could take it as low as $1.50. Although sterling fell against the single currency today, we expect the UK currency to return to €1.53 in the near term as the eurozone’s debt crisis comes back into focus.

Sterling down across the board

Sterling is down on the day against all its major counterparts amid speculation on the publication of the MPC meeting minutes tomorrow morning. The CPI figure came in at 3.1%, well above the Bank of England’s target of 2%.


In other news the euro received a boost following solid demand for bond auctions in Ireland and Spain, which helped ease concerns about EU funding. Against the dollar, sterling has managed to claw back early losses to currently sit a third of a cent down due to higher demand for riskier currencies.

Despite today’s setback, we expect to see the UK currency strengthen against the euro over the coming weeks as fears over the EU’s sovereign debt issues return to focus. The regional debt issues should also send the single currency lower against the greenback, leaving sterling/dollar to trade in a relatively tight range between 1.56 and 1.60 in the medium term.

US non-farm payrolls demonstrate market overreaction.

Overreaction in the currency markets was demonstrated effectively today in the pound/yen currency pairing following the US non-farm payrolls data. Immediately following the release of the figures, the pound plummeted sharply as demand for the relative safety of the Japanese currency was supported by the substantial growth in US unemployment, moving up 0.2% to 9.7%, its highest level in 26 years. However, this knee-jerk reaction, that saw the pound slide 88 pips in 6 minutes, was immediately reversed with the pound proceeding to advance a full percent to an inter-day high of 151.70 as investors realised the relative strength of the payroll data itself that saw fewer jobs lost in August than had been forecast. As investors began to digest the data, the rate settled back down to its morning trading price of around 151.80. This blip in an otherwise steady trading day between the two is a fine example of how trader ambiguity can lead to overreaction on the markets following significant economic information.

Japanese yen experiences turbulent trading

The movement of the Japanese yen has been quite turbulent today, as the currency was hit first by the Bank of Japan’s survey of corporate activity showing that confidence in the sector is dropping at a record pace, to reach its lowest point ever in the first quarter. Companies stated that the domestic market had a bleaker outlook than the foreign market.

Later the yen quickly recovered ground after news that the White House was prepared for the bankruptcy of Chrysler, but retreated slightly when an administration official reported it was inaccurate.

The BOJ is expected to meet next week to discuss the tankan (a quarterly poll of business confidence) and deflation, with speculators believing that the central bank will maintain its 0.1 percent interest rate.