Article / 01 June 2016 at 8:10 GMT

FX Update: JPY pushes back stronger, fresh polls punish sterling

Head of FX Strategy / Saxo Bank
  • JPY strengthens despite confirmation of delay in sales tax hike to late 2019
  • Fear fuelling JPY strength is perhaps that the BoJ is firing blanks with currenty tools
  • GBP hammered by new Brexit poll showing the "Leave" camp leading
  • USD rally is largely in good shape, except for uncooperative USDJPY
Osaka market
 Postponement of Japan's sales tax hike reflects economic weakness, but the yen 
gained nonetheless. Photo: iStock

By John J Hardy

Japanese prime minister Shinzo Abe officially confirmed recent reports that he would look to delay a sales tax hike originally scheduled for April of next year to late 2019. 

A delay of the tax hike was expected to see the JPY weaker (and likely did drive some recent JPY weakness) on the argument that fiscal irresponsibility should weaken the currency. But that was not the case overnight as the overweening fear driving the JPY back stronger is perhaps that the Bank of Japan is firing blanks with its current policy tools, which it cannot practicably expand, and the JPY will only go higher if global risk appetite weakens, as it did yesterday. 

Furthermore, the international environment is less accepting of policies clearly aimed at weakening a currency, which, combined with the Trans-Pacific Partnership issue, could leave Japan with no policy wriggle room for now. Still, Abe did spell out what the eventual solution will be overnight. He mentioned the prospects for fiscal stimulus, as the government has ample room, given the BoJ’s rate of bond purchases, to expand its budget and stimulate demand. (See below chart for technical thoughts on USDJPY here.)

Late yesterday, we got what in hindsight should have been seen as an inevitable poll showing that “opinion has shifted” in favour of the UK leaving the European Union. A Guardian poll showed more in favour of leaving than staying. But let's all recognise that the vote is extremely uncertain and the polls aren’t doing much to help us understand what will unfold. So we need to respect the uncertainty and acknowledge that after the recent sterling rally, the magnitude of the reaction to a shock Brexit vote is that much larger.

Today, attention switches to incoming data, with the US ISM manufacturing risking a dip below 50 if we glance back at the regional manufacturing surveys this month, including yesterday’s Chicago PMI, which came in at 49.3. The question is whether the market has the patience to see through a weak print and look toward the more important Friday US jobs numbers, or if USD bulls are stuck in neutral for a time.


USDJPY is playing cat and mouse with the Ichimoku cloud here, with today’s close vital to watch for whether the cloud is maintained. If not, the focus will shift to Fibonacci retracements, particularly the 61.8% down below 108.00, which could come into play if the US data is insufficiently strong this week. Still, the recent rally to levels above 111.00 has softened the previous downtrend and neutralised, or at least challenged, the bearish case.
Source: Saxo Bank

The G-10 rundown

USD – The rally is largely in good shape outside of an uncooperative USDJPY, and we’ll be looking for more upside if traders can look past a possibly weak ISM manufacturing today and we get in-line or better US jobs numbers on Friday.

EUR – the euro is only garnering a weak bid despite the risk-off mood and a fresh UK poll suggests that it remains vulnerable versus the JPY if risk appetite weakens further and against the USD if the US data picks up. Zero expectations around tomorrow’s ECB meeting.

JPY – Thoroughly addressed above – key here is whether momentum on this reversal builds, and some of the strength of the move may be due to the recent popularity and technical break attempt/reversal in GBPJPY as fresh GBP longs were left high and dry yesterday.

GBP – the latest Brexit opinion poll quite possibly caps sterling’s upside potential ahead of the June 23 referendum as it underlines that we are all flying blind here until the result is in. And after the recent sterling rally, the downside potential is that much more significant if we do get a Brexit.

CHF – continues to bide its time in the range versus the euro and dollar. A more compelling weakening story available if US data surprises to the upside, driving a widening carry versus the USD.

AUD – a boost on the strong GDP report overnight, though this Is not seen as shifting negative sentiment on the Aussie, as we gauge whether this rally can stay above 0.7250 in AUDUSD or if weak US data might mean we tarry above and toward 0.7400 before pushing lower again. Consider this Bloomberg article on the worrying state of Australian banks as long-term input.

CAD – A weak GDP print yesterday, but the action in USDCAD is failing to inspire at the moment, though we continue to prefer to look higher, particularly if oil prices continue to weaken after another test of the $50/barrel area.

NZD – A fellow-traveler with the Aussie overnight, but the squeeze may soon run into resistance in NZDUSD, whether from stronger US data or weak risk appetite. But the chart is one of choppiest in recent memory.

SEK – perhaps enough of a bearish reversal in EURSEK to qualify as “tradeable” for a try toward the lows of the long-standing range, provided the JPY mischief doesn’t set off a round of ugly risk aversion.

NOK – EURNOK nervous within the 9.20-9.40 with a renewed risk rally and stable to higher oil pointing lower and the opposite pointing higher.

Economic Data Highlights
  • Australia May AiG Performance of Manufacturing Index out at 51.0 vs. 53.4 in Apr. 
  • New Zealand May QV House Prices rose +12.4% YoY vs. +12.0% in Apr. 
  • China May Manufacturing PMI out at 50.1 vs. 50.0 expected and vs. 50.1 in Apr. 
  • China May Non-manufacturing PMI out at 53.1 vs. 53.5 in Apr. 
  • Australia Q1 GDP out at +1.1% QoQ and +3.1% YoY vs. +0.8%/+2.8% expected, respectively and vs. +2.9% YoY in Q4 
  • China May Caixin Manufacturing PMI out at 49.2 as expected and vs. 49.4 in Apr. 
  • Switzerland Q1 GDP out at +0.1% QoQ and +0.7% YoY vs. +0.3%/+0.9% expected, respectively and vs. +0.3% YoY in Q4 
  • Sweden May Swedbank/Silf Manufacturing PMI out at 54.0 vs. 53.8 expected and vs. 54.0 in Apr. 
Upcoming Economic Calendar Highlights
  • Euro Zone May Final Markit Manufacturing PMI (0800) 
  • UK Apr Mortgage Approvals (0830) 
  • UK May MArkit Manufacturing PMI (0830) 
  • Canada May RBC Manufacturing PMI (1330) 
  • US May Markit Final Manufacturing PMI (1345) 
  • US May ISM Manufacturing (1400) 
  • US Fed’s Beige Book (1800) 
  • Australia Apr. Trade Balance (0130) 
  • Australia Apr. Retail Sales (0130) 
  • Japan Bank of Japan’s Sato to Speak (0130) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank


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