Article / 19 November 2014 at 8:07 GMT

FX Update: JPY crumbles anew

Head of FX Strategy / Saxo Bank
  • BoJ minutes provide no surprises
  • NZD hits speed bump on milk auction
  • QE-era stock market gains a fragile trend

By John J Hardy

The Bank of Japan meeting overnight provided no surprises and none were expected after the previous meeting’s shock move to double down on the existing easing programme. Haruhiko Kuroda’s press conference saw the Bank of Japan governor touting the success of its quantitative and qualitative easing in terms of employment and wage gains and emphasising the need to achieve the 2% inflation target. 

Kuroda also largely approves of the sales tax delay, which could help the JPY lower as there was some doubt as to whether the BoJ would approve of prime minister Shinzo Abe’s move to call for this delay. 

Shinzo Abe

Prime minister Shinzo Abe's recent economic moves have led the yen 
to tumble dramatically. Photo: Brendan Hoffman \ Getty

NZD hit a speed bump yesterday on the announcement that Fonterra’s milk auction saw prices fall around 3% to the lowest level in years. The 200-day moving average in AUDNZD was approached yesterday in the low 1.0900’s before NZD sold off and took the pair back above 1.10.

I prefer for the pair to stay in the higher range, but we’ll likely need strong signals from the New Zealand economy or the country's central bank to spark more interesting NZD selling. For now, the market is only seeing New Zealand’s fat interest rate and thinking in carry trade terms versus the Japanese yen. 

The current levels in NZDJPY above 94.00 were only once exceeded (in the summer of 2007), and in real effective exchange rate terms (inflation adjusted), this is well into record territory.

EURUSD traded uncomfortably higher yesterday as the euro remains resilient in the crosses. The market will be eyeing that 1.2580 level nervously and we need a strong move back below 1.2500 and perhaps even 1.2450 to bring technical interest in selling the pair. The next test for the euro from the economic calendar will be tomorrow’s preliminary November Purchasing Managers Index survey numbers.


AUDUSD is trading near those 0.8650 lows from early October again after the recent bearish reversal got partial confirmation overnight, but we need to see the pair punching down below 0.8600 with USD strength elsewhere to put the focus back on the US dollar. Otherwise it is all about the JPY and risk appetite.

Source: Saxo Bank

Looking ahead

The UK Bank of England minutes are in focus today. Carney and company have done such a thorough job of backing away from their intent to hike rates, especially after last week’s quarterly inflation report (which is more up to date than today’s meeting minutes), that is doubtful whether these minutes will produce anything of interest. 

On the reaction front, let’s note the 0.8050 area in EURGBP, which defines the top of the range and the descending 200-day moving average.

Tonight, the focus will be on the Federal Open Market Committee minutes release late today. The last minutes saw the market dramatically push back the anticipated date of the first Federal Reserve rate hike. The excuse was the minutes’ discussion of the potential effects of a strong US dollar, but we have to remember that US stocks were suffering a fairly dramatic bout of weakening at that point and it was in the same time frame that we had St. Louis Federal Reserve president James Bullard out talking up the desire to cancel the taper and the possible need for new easing. 

This saved the stock market, and then the BoJ move on October 31 set all global equity markets ablaze with fresh, aggressive gains.

Please see Hugh Hendry’s commentary over on Zero Hedge on how he sees the macro landscape in an age of global central bank money printing. He believes that everyone has to be long risky assets because central banks believe that this is the only policy they can have and will do anything to avoid a shock to markets. 

Money printing

The current wave of central bank stimulus programmes have both boosted 
and distorted equity markets worldwide. Photo: iStock

The October situation in the US certainly seemed to demonstrate that. My favourite quote and the one that may ring most true: "when instead the persistent upwards drift in stock markets is more a reflection of the steady erosion of the soundness of the global monetary system and therefore the rise in stock prices is something that is likely to prevail for some time". 

This “steady erosion of the soundness of the global monetary system” is the crux of the matter and I generally agree with his statement. The question as always is how durable this trend (and the market’s belief in it) will prove. Something will break eventually, and it could be something as simple as a loss of confidence that triggers it.

On that note, stay careful out there.

Upcoming Economic Calendar Highlights (all times GMT)

  • Euro Zone ECB’s Praet to Speak (0900) 
  • UK Bank of England Minutes (0930) 
  • Euro Zone Sep. Construction Output (1000) 
  • Switzerland Nov. Credit Suisse ZEW Survey (1000) 
  • Norway Norges Bank Olsen to Speak (1030) 
  • US Oct. Housing Starts and Building Permits (1330) 
  • Riksbank Deputy Governor Floden to Speak (1700) 
  • US FOMC minutes for Oct 28-29 meeting (1900) 
  • New Zealand Q3 PPI Input/Output (2145) 
  • Japan Oct. Trade Balance (2350) 
  • Japan Nov. Preliminary Markit/JMMA Manufacturing PMI (0135) 
  • China Nov. Preliminary HSBC Manufacturing PMI (0145) 

-- Edited by Michael McKenna

John J Hardy is head of FX strategy at Saxo Bank. Follow John or comment below to engage with Saxo Bank's social trading platform. 


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