- Japanese govt. advisor talked helicopter money with Bernanke
- GBPJPY behaviour post-BoE meeting key to yen action from here
- Baseline expectations are for a 25bps BoE rate cut
We're likely in for a BoE rate cut today. Pic: iStock
By John J Hardy
This morning, USDJPY has squeezed above the 105.00 level. Running counter to official comments denying the prospects of helicopter money yesterday, we saw overnight the news that Abe advisor Etsuro Honda discussed specific helicopter money strategies with former Fed Chairman Bernanke on his visit to Japan this week. We judged the 105.00/50 area as the key resistance zone for USDJPY and has traded slightly above there this morning. The behaviour of GBPJPY after today's Bank of England meeting and today’s close are critical for whether the JPY crosses can work higher – for the benchmark USDJPY into the next resistance layers toward 106.50/107.00 – or whether we are merely running the stops ahead ahead of the BoE.
Kiwi is on the ropes after the Reserve Bank of New Zealand announced that it will release an “economic assessment” on July 21 due to “the longer-than-usual gap between MPSs as the Bank moves to its new release timetable this month.” The assessment comes just a few days after the July 18 release of the Q2 CPI and could be a chance for the RBNZ to send a shot across the bow on a more dovish tilt to its guidance, given that the headline CPI was already flirting with 0% in Q4 and was a mere 0.4% in Q1 and that the trade-weighted exchange rate has backed up
aggressively since then.
The focus today is on the BoE and how aggressively it responds to the economic risks posed by Brexit, with baseline expectations for a 25-basis rate cut and predictions of QE in the pipeline at future meetings. There is also the valid idea that if the BoE cuts, it cuts all at once and takes the rate to an effective zero today, or some level negligibly above zero. We expect more sterling weakness in the wake of whatever governor Mark Carney and company deliver today, as the desire may be to err on the side of dovishness.
Theresa May’s new cabinet underlines the seriousness of Brexit as she appointed loud Leave votes to key positions, including Boris Johnson as foreign secretary. This could operate as an additional drag on sterling as the “second referendum” or “Bregret” scenario odds fade quickly to nil with this new cabinet.
The best UK housing indicator, the RICS House Price Balance, dropped to a stunning -46 in London from -35 in May (responses for June were taken after the June 23 referendum vote), and the nationwide indicator merely dipped to 16% from 19% previously, and versus 10% expected. This doubly underlines that London is an economy unto itself and the most challenged by the implications of Brexit.
Finally signs of a better quality reversal for beleaguered AUDNZD bulls as the action overnight firmly rejected the last leg of selling that unfolded on the S&P downgrade of Australia’s sovereign debt. The move comes after a long period of MACD momentum divergence and the minimum objective to the upside looks like the 200-day moving average, though longer term charts show the 1.1300+ area is the bigger long term level for this chart and a head and shoulders neckline.
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The G10 rundown
USD – Friday’s US data the next excuse to take a view on the US dollar – we’re expecting the greenback to find its legs eventually, but broad strength may continue to elude USD traders as long as we are on maximum risk rally mode, which is partially driven by the Fed’s supine monetary policy stance.
EUR – EURUSD is a hopeless waste of time as the USD and the euro seem to have the lowest beta to everything else transpiring at the moment – prefer the pair lower, but need to see a technical reason to pick up interest, starting with a close below 1.1000. The bank recapitalisation question is the key one dogging Europe at the moment.
JPY – we’re more than a thousand pips off the lows in GBPJPY and EURJPY has managed 750 pips of upside – looking at today’s BoE as the possible pivot point to putting a halt to the short squeeze.
GBP – Today’s BoE the next step – if BoE under-delivers relative to quite dovish expectations, there could be further room for sterling mean reversion to key levels like 1.3500 in GBPUSD and toward the 0.8225 technical target in EURGBP, but easing is easing and we still suspect the pound has not seen its lows for the cycle. Options have become far more reasonable to employ for expressing a directional view now that implied volatilities have come in to more reasonable levels.
CHF – a bit surprised EURCHF hasn’t managed a better performance here. Perhaps the USD’s inability to put in a better performance and yesterday’s disappointing reversal after USDCHF crossed to new local highs are the chief focus for CHF traders.
– Australian dollar rebounding against the kiwi, but still looking uncertain at the top of the range versus the US dollar, while AUDJPY has blasted above 80.00 this morning. We’re in the difficult positioning of recognising the near-term strength while fretting the longer-term fate of the Aussie once its credit cycle turns. Consider, for example, today’s comments from Mike Shedlock on signs of credit worries in the private sector in Australia
CAD – stronger on a fairly complacent Bank of Canada statement yesterday, albeit one that has entirely failed to move actual Canadian rate expectations. USDCAD looks aimless within the range and we still prefer an eventual resolution higher.
NZD – fairly thorough coverage of NZD above – looking for a reversal in the kiwi’s fortunes here.
SEK – Risk appetite blasting every higher giving SEK a modest boost versus the euro.
NOK – EURNOK stuck in mid-range. Recent CPI shows real rates in Norway are worst in class among G10 currencies – core CPI at 3.0%. Perhaps Abe’s advisors should have a word with Norwegian experts. rather than Bernanke.
Upcoming Economic Calendar Highlights (all times GMT)
- UK Bank of England Rate Announcement (1100)
- US Weekly Initial Jobless Claims (1230)
- US Jun. PPI (1230)
- US Fed’s Lockhart to Speak (1515)
- US Fed’s George (FOMC Voter) to Speak (1715)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank