Article / 12 February 2013 at 9:11 GMT

Pre G20 noise sustains wild EUR- and JPY swings

Head of FX Strategy / Saxo Bank

We have a new high in USDJPY overnight (see the trigger below) as this market remains all about EUR and JPY gyrations ahead of the G20 at the tail end of this week and Thursday’s BoJ meeting. Something tells me that this phenomenon will quickly fade once these event risks are out of the way, which will allow the market to consider whether it has taken things too far and what developments it has been neglecting in the meantime. The JPY downside may have been further aggravated in late Asian trading by the news that North Korea has tested another nuclear device, though the reaction to that kind of news is usually ephemeral. As well, bond markets are stable, which could keep the JPY crosses choppy within the range as the key event risks wait.

Yellen the dove
Perma-dove Yellen was out speaking late yesterday and hinted that the Fed could keep interest rates very accommodative even after QE has been wound down (one has to make the dramatic leap of faith that the Fed ever unwinds QE…most of these dovish officials’ discussions of the other side of QE assume that the US economy is gaining some kind of traction and will continue to do so, the massive ongoing need for the private and public sectors to deleverage notwithstanding. Good luck with that one, FOMC…) Yellen made a cheap shot at the government and its budget policy as one significant source behind the economic weakness. Oh dear…let’s hope that she doesn’t replace Mr. Bernanke as Fed chairman next year.

Pre-G20 noise from US treasury
Yesterday evening saw new multi-year highs in USDJPY - as the US under-secretary of the treasury Brainard expressed sympathy with Japan’s attempt to stimulate growth and end deflation with its new monetary policy efforts. Brainard added to the recent G-7 P.R. campaign to defuse speculation that the major economies are slipping into a currency war as she also said that the G7 is committed to floating exchange rates except in emergency situations and that fiscal and monetary policies should be aimed at domestic objective, not the strengthening of exports . Rhetorical question, Ms. Brainard: what if the domestic objective is to strengthen the economy by strengthening exports and the best tool for said strengthening is currency weakening?

In any case, Mr. Brainard’s comments looked like a green light for further JPY weakening, given that we have mostly seen grumbling from US and EU officials of late on the use of exchange rates to gain an economic boost. And several hours prior to these comments, the ECB’s (Bundesbank’s!) Weidmann was out with a hard-money broadside that the Euro was not overvalued at current levels and that policy geared toward weakening the Euro would only risk inflation. This line of rhetoric is so contradictory to the needs and desires of the EU’s Club Med that it’s only a question of time before the political cracks begin to widen in the EU once more.

Looking ahead
The SNB’s president Jordan will be out speaking in Geneva shortly.

The Cyprus situation is an embarrassing one for the EU as a bailout has been delayed to give an independent auditor a chance to investigate Cyprus banks for evidence of money laundering. See this Guardian article for more. The takeaway here is whether this deal triggers the risk of capital flight from Cyprus banks – this could mean Swiss franc activity as well, though one wonders how many have yet to move their funds at this late stage of the game.

UK Inflation data is up later and will likely have a bearing on the zany chop-fest that is EURGBP. I think the EURGBP upside is overdone short term, but GBP-negative inflation data could mean another spring higher to near the top of the range before we push back lower toward 0.8400 or even lower.

Tomorrow we have a Riksbank meeting that comes as Swedish officials are increasingly upset with the strong krona. The consensus is fairly evenly divided on whether the Riksbank cuts tomorrow. I lean towards a cut on further recent evidence that the house market is rolling over in Sweden and USDSEK is beginning to look interesting as it may have put in a base here. Stay tuned.

The 6.44 area is the first interesting flat-line level of interest as this was the old low and the recent high and will soon be the point that meets the falling trend-line. A rally taking out this level could be interesting for follow through to the next key line of resistance at 6.50 and beyond toward the 200-day moving average. Retracement levels of interest to the downside include the 0.618 Fibo at around 6.35.


Economic Data Highlights

  • New Zealand Jan. REINZ Housing Price Index out at -1.0% MoM
  • UK Jan. RICS House Price Balance out at -4% vs. +1% expected and -1% in Dec.
  • Australia Jan. NAB Business Conditions out at -2 vs. -5 in Dec.
  • Australia Jan. NAB Business Confidence out at +3 vs. +2 in Dec.
  • Japan Jan. Consumer Confidence out at 43.3 vs. 39.2 in Dec.
  • Japan Jan. Preliminary Machine Tool Orders down -26.1% YoY vs. -27.5% in Dec.
  • Switzerland Jan. CPI out at -0.3% MoM and -0.3% YoY as expected and vs. -0.4% YoY in Dec.

Upcoming Economic Calendar Highlights (all times GMT)

  • UK Jan. PPI Input/Output (0930)
  • UK Jan. CPI and RPI (0930)
  • Switzerland SNB’s Jordan to Speak (1000)
  • US Fed’s George to Speak (1630)
  • US Fed’s Lockhart to Speak (1830)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • Australia Feb. Westpac Consumer Confidence (2330)
  • Japan Jan. Domestic CGPI (2350)
  • US Fed’s Plosser to Speak (0030)
  • US Fed’s Lacker to Speak (0030)
nickolas nickolas
John Hardy Do you think it is possible to summit or after the summit pair USDJPY back down to the level of 92.10? thank you?


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