- Japanese Yen down on rumors about BOJ policy tactics; purportedly will only ease if Yen strengthens.
- See the DailyFX economic calendar for the week of October 2 to October 7.
The US Dollar is gaining ground broadly today, with the British Pound, Euro, and Japanese Yen all pitching in (AUD/USD is holding steady after the RBA rate decision). Given that the US Dollar's gains today aren't driven by domestic factors - US economic data continues to weaken, as per the Atlanta Fed GDPNow Q3'16 growth tracker - and that the US economic calendar is quiet ahead, it's worth examining these individual exogenous factors.
For the British Pound, fresh yearly lows are in today versus the Euro and the US Dollar (among others) on the back of fresh commentary regarding the triggering of Article 50 from UK Prime Minister Theresa May. As I warned at the end of August and followed up with last Monday, the onset of Brexit commentary from UK policymakers has tended to be negative for the British Pound as the new government is forced to reconcile the promises of the Brexiteers/Leavers with the realities of economics. Don't expect this trend to dissipate anytime soon.
As a current account deficit country, the UK needs a weaker British Pound; recent signs that the country is heading for a 'hard Brexit' suggests that trade will be impacted dramatically, worsening the CA deficit, further necessitating a weaker British Pound to keep the economy competitive. I wouldn't be surprised if we see GBP/USD drop into the mid-$1.1000s and EUR/GBP rally into the mid-£0.9000s in the event of a 'hard Brexit.' (This is not new; the dramatic a worsening UK CA deficit, in particular compared with Japan at the time, was one of the reasons I chose short GBP/JPY as my trade opportunity of the year.)
For the Euro, there's not much to look at on the calendar - PPI data was slightly weaker than anticipated, further underscoring the disinflation/deflationary overhang on the region. Instead, it seems that the sheer number of small negative stories on the Euro's periphery are adding up: Brexit back in the headlines; the ongoing trend of weak price data; Deutsche Bank still without a deal with the US Department of Justice. As noted previously, I believe the odds of another ECB rate cut this year are underpriced. See the Q4'16 EUR/USD forecast, "EUR/USD Coil Grows Tighter as Central Banks, Politicians Face Credibility Deficit."
For the Japanese Yen, weakness is afoot today amid rumors from "sources" that the Bank of Japan is going to tailor its monetary policy to prevent the Yen from strengthening significantly. Such a shift in policy would be more or less an admission of failure of Abenomics, and would likely usher in a wave of volatility across asset classes. It's rather telling that on a day where USD/JPY is gaining ground, US equity futures are rather mundane. Instead, it's weakness in the local currencies (Nikkei/JPY, DAX/EUR, FTSE/GBP) that are proving to be the drivers. Such price action, albeit too soon to confirm, is somewhat indicative of a 'zero-sum central bank policy' mindset reestablishing itself in the market - which is not good.
--- Written by Christopher Vecchio, Currency Strategist
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