TRADERS´ Blogs

We are rounding off a week where USDJPY rose to a high of 99.30 before crashing to a low of 93.79, the Nikkei fell more than 6% and EURUSD and GBPUSD climbed to their highest level for four months. We will talk more about the events in Emerging markets in our Week Ahead report released later, but needless to say there was carnage in EM FX, which resulted in official intervention in Poland, Turkey, Indonesia, Brazil and India to stem the decline in their currencies.

USDJPY took another lurch lower overnight, dropping another 200 pips. This cross is at its lowest level since early April.

So is Abenomics unravelling? In our view it is a combination of the 2 factors:

1, uncertainty about the timing of Fed tapering, spooking stock markets and causing a flight to safety.

2, Signs that the BOJ may not be as committed to its stimulus plan as the market thought it was.

UK labour market data due at 0930 BST is the highlight on the European economic calendar today. The market expects a drop in jobless claims of 5,000 for May, and for April’s unemployment rate to remain steady at 7.8%. But don’t get too excited, wages are expected to grow a measly 0.2% in April. This comes after the Institute for Fiscal Studies reported that UK wages have fallen more in real terms during the current economic downturn than ever before:  http://www.bbc.co.uk/news/business-22860320

There’s been some choppy price action today and the dollar has been the main loser, however, this does not suggest to us that the market is getting tired of the strong dollar theme just yet. It was only 24 hours ago that the market was fawning over the strongest level of annual house price growth in the US for 6 years and the highest level of consumer confidence since 2008. The dollar index surged to major resistance at 84.50 at one point on Tuesday and, unsurprisingly in our view, has been sticky around this key resistance level since then.

USDJPY has managed to claw back recent losses today as it has followed the Nikkei (the Japanese stock market) higher and been given a boost by a better than expected reading of US consumer confidence, which rose in May to its highest level for 5 years.

It’s been a rough morning for GBP, with economic data thwarting early attempts at a GBP recovery. BOE minutes, retail sales and public sector data all weighed on the pound, pushing it below 1.5100 – a key support level. Data details: 

The pound has come under pressure after the weaker than expected inflation reading for April earlier this morning. Headline CPI fell to 2.4% (expectations were for a decline to 2.6%, from 2.8% in March). This is the lowest level since September 2012. But it was the sharp decline in core prices that was the most noteworthy part of the report. Core prices (which don’t include energy and food) fell to 2%, the lowest level since 2009, and, most importantly, bang on the Bank of England’s 2% target rate.

It’s been pretty slow-going today as economic data has been thin on the ground. Ranges in FX are fairly tight and stock markets are flat to fairly neutral. Currently US futures are pointing to a slightly lower open. But there are some important fundamental events this week that could impact the medium-term direction of markets.

After a slow start in financial markets this week a couple of themes are emerging: the yen is rebounding and the euro is getting hit from comments coming out of  the Eurozone finance ministers meeting in Brussels.

The RBA is the latest central bank to cut interest rates following the ECB’s decision last week. The Australian central bank cut rates by 25 basis points to 2.75% - an all time low – earlier attributing the cut to the inflation rate likely to be “a little lower than expected” in the coming months. Weaker inflation pressures gave the RBA scope to cut rates, however the strong exchange rate may have also played a part. The RBA statement noted that although interest rates have already been reduced substantially the exchange rate has been “little changed” and “remains at historically high” levels for more than 18 months. This hurts exports, especially now that the country’s mining boom is considered to be close to its peak.