Morning Briefing – Yen at 21-month highs vs USD

<p>The most obvious place to start after a busy night for monetary policy is with the yen.</p>


  • The most obvious place to start after a busy night for monetary policy is with the yen. As if the Bank of Japan needed any further evidence that its most pressing tasks this year are to wrest back control from speculators and reassure safe-haven yen buyers that its policies have legs, that was brought home to the central bank in no uncertain terms overnight. Again. The ¥104 handle per dollar has been seen for the first time since 8th September 2014. The yen got as high as ¥104.87 to the greenback, to the highest against the euro since January 2013 at ¥116.94 and another high since the same year vs. sterling at ¥146.40.
  • We would hardly have expected anything less, especially given the current global market climate. As widely forecast, the BoJ did not take the opportunity offered by its meeting overnight to act against the latest leg of the yen’s significant appreciation this year, making it the second ‘systemically important’ central bank within hours to refrain from changing policy, the Fed being first. Perhaps at least the bank might have managed to blunt some of the sharpness of last night’s moves if it had managed to reclaim some ground in the debate about what the market seems to regard as credible policy. As it is, the BoJ stuck to its optimistic view of the economy (as well as holding policy steady) in the face of the roaring yen, tumbling stocks and consecutive record low JGB yields, another one of which was notched overnight. The bank did soften its view on the outlook for consumer inflation versus in April. It now sees the year-on-year change slightly negative or zero. Cash in deposits target still ¥86 trillion; -0.1% rate on banks’ excess deposits remains. At the presser, governor Kuroda invoked ‘Brexit’ as a major reason to stand pat. It’s de rigueur amongst central banks right now, don’t you know? Either way, there’s little prospect that the yen will take a break between now and the next BoJ meeting on 28th-29th July.
  • And so to Janet Yellen’s Fed. The chair said Brexit risk was a feature for its collective thinking too. Either way, the bank’s remarkable transformation from the most hawkish monetary policymaker in the world a few months ago into… well still one of the most hawkish banks, but much less so, was complete. The path of rate hikes will now be slower, in step with the bank’s downgraded views on economic growth, which it now sees as being below-trend and, crucially with its view that “the pace of improvement in the labour market has slowed”. No statements with respect to timing, which surely opens the way to zero rate hikes this year, despite the Fed’s official expectation that 2017 could bring three rate hikes, after two in 2016.
  • The market doesn’t expect that many. 10-year Treasury yields broke a four-month floor, gold touched a more than six-week high, and the dollar index nixed all gains this week.
  • So for once, the Brexit front was not the main feature overnight. Though, as we expected, sterling has given back Wednesday’s gains and was last eyeing $1.4115, from the slightly higher perspective of $1.415. The euro was making back up the ground to £0.799s.
  • The latest major poll, this one from Ipsos Mori, backs Brexit 53%, to 47%.
  • The Bank of England takes centre stage today, after retail sales figures a short while ago. The governor is now covered by ‘purdah’ rules, meaning he can’t talk about European matters, which is actually a bit of a relief. A sombre view of the economy is still likely to be communicated, updated forecasts are possible and some sort of signal on rates might be seen. One additional BoE development this morning was seen. Governor Mark Carney has come out fighting against claims that the bank is not independent, after a Leave board member said the governor “needs to be very careful what he says.” It was the latest in a long line of attacks from the Brexit camp. The governor’s long written response accused that board member of not understanding the constitution. He said the MP “demonstrates a fundamental misunderstanding of central bank independence”.
  • Those UK Retail Sales brought some welcome positives: they were well above forecasts in May at 0.9%, confounding expectations of a fall to 0.3% after a 1.9% rise in April. Year-on-year, even stronger. A 6% rise vs. forecasts of 3.8% and 4.3% in April.
  • In the UK, that burst of positive economic news might help offset the hit to equities sentiment from losses sustained over the last several hours, especially in Japan, with a 3% Nikkei fall, a 0.5% decline in Shanghai, the DAX taking the baton with a fall of 0.7% at the time of writing, and the same on the FTSE.
  • The SNB also declined to change policy this morning, though it said it would act strongly to stabilize markets if Brexit occurred.


 Please look out for our updates on the above market developments and others throughout the day.





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