US president Donald Trump's latest round of tariffs land squarely on Europe, Mexico, and Canada with the consequent slowdown in trade likely to reduce demand for oil and refinery products, and transportation fuels in particular.
Article / 26 July 2016 at 8:42 GMT

FX Update: JPY jumps as Aso deflects great expectations

Head of FX Strategy / Saxo Bank
  • Yen surges as Japan finance minister says fiscal stimulus size not yet decided
  • JPY fundamentals, positioning difficult to navigate ahead of BoJ meeting
  • Sterling falls on UK bank's warning to business depositors and BoE concerns

Democratic convention
Trump took a lead in the polls, as the Democratic convention began with embarassing leaks from the DNC and acrimony from Sanders supporters. Photo: iStock 

By John J Hardy

The yen surged overnight on frustration that Japan is not clearly moving ahead with the “next phase” of fiscal/central bank coordination, as Japan’s finance minister Aso said that the size of fiscal stimulus had not yet been determined and that it was up to the Bank of Japan to do the utmost to take inflation to target. 

As the BoJ is seen as largely impotent to move the currency with its current toolkit, the yen pushed to the upside as recent JPY shorts are concerned that the Abe government seems to be biding its time for now on fiscal stimulus, while having explicitly ruled out helicopter money. 

Usually, however, the backdrop of strong risk appetite is a JPY-negative, so understanding exactly how we are positioned going into Friday’s meeting is difficult to determine. If the Bank of Japan does deliver something, we may be surprised when the market decides to sell yen after all. 

That’s a scenario, and a low confidence one, but the only thing that is clear is that the JPY fundamental drivers and positioning are all very tricky to navigate here, as we wait for whatever the BoJ does or does not bring on Friday. Given that the bigger reaction may be on fiscal announcements from here, longer term traders might consider buying upside options in USDJPY on any further JPY upside, as the market may be overplaying the BoJ disappointment.
Trump is now leading Clinton in some polls as Trump clearly received an emphatic “convention bump”, while the Democratic convention has gotten off to ugly start with embarrassing leaks to the press from the DNC and Sanders’ supporters booing Clinton and his announcement of supporting her. Meanwhile, Trump is openly courting Sanders supporters.

Our base expectation for tomorrow’s Federal Open Market Committee statement is that it tries to push the expectations for a September move a bit higher, with clear data dependency, and that this is seen as hawkish at the margin. It’s hard to see the Federal Reserve peddling too much “uncertainty” when equities are trading at all-time highs.

The pound suffered a fresh bout of weakness overnight as NatWest, a prominent UK bank, sent a letter saying it may have to charge business customers to accept deposits, even if personal accounts are not affected. This is in the event that the Bank of England takes rates into negative territory. As well, the BoE’s Weale was out yesterday saying that his level of concern on the UK economy is far higher than it was when the BoE last met.


USDJPY is in steep retreat, but may find support in the low 104.00’s (Fibo) and, if not there, around 103.50/25, if only to get a peek at what the BoJ has to say on Friday. The FOMC tomorrow evening can also have a hand in the near-term price action.

The G10 rundown

USD – markets are clearly nervous that the FOMC has nothing to deliver tomorrow, as the news overnight saw the market easily squeezing low-conviction USD longs out of their positions, with EURUSD squeezing above 1.1000 – but we’ll have a better sense post-FOMC.

EUR – little conviction in the euro, which looks low beta to other currency movements for now – waiting for Friday's bank stress tests and whether these move the needle.

JPY – a surge overnight, but there is plenty of room for two-way trading pre- and post-BoJ. If the BoJ "disappoints," it's not sure that the initial reaction is to be trusted.

GBP – sterling sold again on fresh worries of rate cuts after the overnight news. EURGBP and GBPUSD are pushing at 2-week sterling lows this morning.

CHF – no fresh impressions after overnight moves.

AUD – AUD bobs higher vs. the USD on USDJPY moves, and as China has kept CNY very stable recently. The Australian inflation release tonight is pivotal for the AUD direction from here.

CAD – weak oil prices are keeping pressure on CAD, though USDCAD needs to survive above 1.3150 pre- and post-FOMC to keep the rally interest alive. After considerable noise on possible measures to stem the hot money inflows into Vancouver, a new 15% property transfer tax will now be levied on foreign buyers of metro Vancouver properties, to take effect next week.  

NZD – NZDUSD squeezes after the selloff lost momentum amid the wait for the Reserve Bank of New Zealand on August 11. We prefer the downside, but the pivot zone in the 0.6950/0.7000 area remains intact for now.

SEK – the EURSEK rally looks well organised, and could head higher still if Sweden's upcoming data risks through this Friday disappoint. Not much more range to work with there, actually, as 9.60+ looms.

NOK – the EURNOK rally is coming alive here on weak oil prices and the JPY rally. If the 9.45 level can’t hold today, we open up the last bits of the range to 9.70.

Upcoming Economic Calendar Highlights (all times GMT)
  • Hungary Central Bank Decision (1200) 
  • US May S&P/CaseShiller Home Price Index (1300) 
  • US Preliminary Jul. Markit Services PMI (1345) 
  • US Jul. Consumer Confidence (1400) 
  • US Jun. New Home Sales (1400) 

— Edited by D. Deacon

John J Hardy is head of FX strategy at Saxo Bank 


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