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Japanese Yen May Extend Recovery as Risk Appetite Fizzles

Japanese Yen May Extend Recovery as Risk Appetite Fizzles

Ilya Spivak, Head Strategist, APAC

Talking Points:

  • Yen gains, commodity Dollars retreat as yesterday’s risk-on surge retraces
  • Sentiment boost following early end of UK PM contest might prove fleeting
  • Downbeat BOC rhetoric may feed risk aversion, drive continued Yen gains

The sentiment-linked Australian, Canadian and New Zealand Dollars corrected lower and the anti-risk Japanese Yen rebounded as markets corrected after yesterday’s rosy turn in the markets’ mood. Investors appeared to be cheering the ascent of Theresa May to UK Prime Minister, replacing outgoing David Cameron in the wake of the UK Brexit referendum. Tellingly, the British Pound rose alongside higher-yielding currencies and share prices.

The markets were gearing up for a prolonged leadership struggle but Ms May was left as the last candidate standing earlier this week, resolving who will take the reins in just three weeks. That acceleration in the timeline seems to have inspired hope that lingering uncertainty surrounding implementation of the referendum’s outcome could be unwound sooner than previously expected. It remains to be seen if details on the makeup of the new administration and its policy proposals will continue to buoy sentiment.

Looking ahead, a quiet economic calendar in European trading hours is likely to keep risk trends at the forefront. Global growth momentum in the wake of the Brexit vote remains a central theme. Updated economic forecasts accompanying the Bank of Canada monetary policy announcement will mark the next chapter in this narrative. News-flow out of the North American economy has deteriorated relative to forecasts since the central bank’s last sit-down in late May, which may foreshadow a downbeat tone.

Meanwhile, comments from Dallas and Philadelphia Fed Presidents Kaplan and Harker may strike an upbeat tone if they fall in line with the cautiously optimistic remarks from other US central bank officials this week. The Fed’s Beige Book survey of regional economic conditions may likewise paint a supportive picture. Indeed, a Citigroup index tracking US news-flow relative to expectations has been firming since mid-May and now implies the strongest outperformance in six months.

On balance, the risk-off side of the argument may prevail. While the naming of a UK PM ahead of schedule is better than the alternative, this doesn’t diminish Brexit’s many challenges but only starts work on them sooner. Furthermore, markets will hear little that they’ve not already accounted for if Fed officials maintain the party line. An ominous BOC tone coupled with a likely tendency toward profit-taking before the looming BOE rate decision following yesterday’s risk-on surge may prove more potent.

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

21:30

USD

Fed's Kashkari Holds Town Hall Meeting

-

-

-

22:45

NZD

Food Prices (MoM) (JUL)

0.4%

-

-0.5%

00:30

AUD

Westpac Consumer Conf Index (JUL)

99.1

-

102.2

00:30

AUD

Westpac Consumer Conf SA (MoM) (JUL)

-3.0%

-

-1.0%

00:30

NZD

RBNZ’s McDermott Speaks

-

-

-

02:30

USD

Fed's Mester Speaks at Business Luncheon

-

-

-

04:30

JPY

Industrial Production (MoM) (MAY F)

-2.6%

-

-2.3%

04:30

JPY

Industrial Production (YoY) (MAY F)

-0.4%

-

-0.1%

04:30

JPY

Capacity Utilization (MoM) (MAY)

-2.4%

-

-1.0%

07:00

CNY

Trade Balance ($) (JUN)

45.65b

49.98b

07:00

CNY

Exports ($) (YoY) (JUN)

-5.0%

-4.1%

07:00

CNY

Imports ($) (YoY) (JUN)

-6.2%

-0.4%

07:00

CNY

Trade Balance (CNY) (JUN)

323.00b

324.77b

07:00

CNY

Exports (CNY) (YoY) (JUN)

0.3%

1.2%

07:00

CNY

Imports (CNY) (YoY) (JUN)

-1.2%

5.1%

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

08:30

GBP

BOE Credit Conditions & Bank Liabilities Surveys

-

-

Medium

09:00

EUR

Eurozone Industrial Production SA (MoM) (MAY)

2.0%

1.1%

Medium

09:00

EUR

Eurozone Industrial Production WDA (YoY) (MAY)

1.3%

2.0%

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EURUSD

1.0932

1.1006

1.1033

1.1080

1.1107

1.1154

1.1228

GBPUSD

1.2528

1.2850

1.3048

1.3172

1.3370

1.3494

1.3816

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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