2 Major Pairs Embattled in Politics
The Japanese yen (JPY) and British pound (GBP) were the big movers in the currency markets overnight with USDJPY enduring a seesaw ride in the wake of a report by the Japanese pension reform commission, while GBPUSD was crushed by a wider-than-expected UK current account deficit.
In Japan, Takatoshi Ito, Chairman of the Japanese Committee on Pension Reform, issued a report that called on the government to raise the national sales tax and take better control of the country's fiscal finances. He also urged investment managers to diversify away from Japanese government bonds (JGBs), which offer the lowest yield in the industrialized world and have provided very low returns to pension funds.
Although Ito stressed that investment managers should diversify into property, private equity, and commodities in order to increase returns, he failed to note that they should seek more international investments, and that caused USDJPY to reverse some of its gains.
The pair had spiked up more than 80 points in afternoon Asian trade on the assumption that Ito would advise further yen diversification, but his failure to do so unwound a large part of the move, and USDJPY once again failed to hold 99.00 and drifted back to 98.50.
With no meaningful progress on reform in Japan, and with US policymakers mired in a standoff over budget and debt ceiling matters, USDJPY has little reason to rally. The pair has been trapped in a narrow, 99.50-98.50 range for several days, and it appears heavy at the moment, with shorts looking to break the 98.00 level and test the longer-term support near 97.00.
A Short-Term Setback for GBP/USD
Meanwhile, GBPUSD was slapped to the downside after UK GDP data failed to show any upward revisions. Second-quarter GDP came in at 0.7%, as expected, but Q1 readings were reduced by GBP 7.3 billion, and more importantly, the current account data saw a wider-than-expected gap of -13B versus -11B expected. Cable dropped on the news, hitting a low of 1.6035 after failing to clear the 1.6100 barrier just ahead of the release.
Although the latest UK data was a disappointment for GBP bulls, the GDP and current account news is backward looking, and is unlikely to have any sustained impact on the pair. As long as the UK economy continues to operate at the present pace, GBPUSD should remain well bid and outperform its peers, especially given the policy confusion in the G-3 universe.
2 Political Crises That Could Spell Disaster
In North America today, the economic calendar is light with only weekly jobless claims and pending home sales on the docket. The markets are likely to remain in a relatively tight range as traders continue to monitor the events in Washington DC.
See related: A Fiscal Catastrophe Just 3 Weeks Away
Meanwhile, events unfolding in Italy could also have an impact, as reports suggest that embattled Silvio Berlusconi's People of Freedom (PDL) party may resign en masse from Parliament on October 4. The euro (EUR) weakened off that headline as traders become concerned that the country may be thrown into another political crisis. So far, EURUSD has held near the 1.3500 level, but if the threat turns out to be real, it could quickly tumble through the 1.3450 support level.
By Boris Schlossberg of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.