Yen crushes FX, some things don’t change

<p>Correlations come and go, the old normal gives way to the new normal and back, but one thing remains intact; the Japanese yen is the […]</p>

Correlations come and go, the old normal gives way to the new normal and back, but one thing remains intact; the Japanese yen is the best performing currency over the last 24 hours, over the last five days and since the start of the month as global equity indices fall hard. 

And considering the deteriorating political uncertainty in the UK displaces, this helps explain why shorting GBPJPY has been among our top performing ideas over the past 2 weeks.

Sterling’s UKIP curse here to stay

Deteriorating political uncertainty in the UK displaces any signs of improving fundamentals. Last week’s UK Independent Party UKIP (UKIP) win by Conservative defector MP underlines the risk of growing support and additional defections out of the market-friendly Conservative Party and into the coalition-threatening UKIP as the Party supports exiting the European Union. Demands from UKIP leader Farage that an EU referendum ought to be held in July 2015 and not in 2017 will not be kind for GBP bulls.

This explains why S&P issued a warning about downgrading the UK’s AAA rating in the event that the UK exits the EU.

We reiterate the following: Even if the probability of the UK voting to stay in the EU is 70% or 80%, it is the mere fact that that the possibility of UK exiting the EU is in existence is a sufficient negative for the currency. Any improvement in the fortunes of the anti-EU UKIP would be detrimental to EU-UK business relations, particularly for small and medium-sized UK companies as the party augments chances of the UK voting to leave the EU at the 2017 referendum.

CPI-UKIP combo crushes sterling

Plunging food prices alongside declining energy prices and the lingering effect of sterling strength are magnifying the ensuing losses in the currency.

Today’s release of UK September CPI, hitting fresh 5-year lows at 1.2% from 1.5% in August and the core CPI tumbling to 1.5% from 1.9%, mean that inflation remains well below the 2.0% target for nine months, further diminishing the case for the dissenting hawks at the BoE’s MPC.

GBP bulls seek tomorrow’s Jobs/Earnings validation

GBP sentiment has grown so negative to the extent that traders are increasingly shrugging the plunging in UK unemployment and focusing on the negative earnings figures, further validating the case for the hawks. Sterling watchers turn towards Wednesday’s release of Sep jobless claims, expected at -35K from prev -37.2%; the Aug ILO unemployment rate seen at 6.1% from 6.2% and Aug average weekly earnings seen at 0.7% from 0.6%. Increased emphasis on the earnings figures and the ex-bonus (exp 0.8% from 0.7%) means the jobs report has 4 components and more resistance for GBP bulls to cheer. Technically, were on the cusp of the 3rd Death Cross on the daily GBPUSD, involving 100-200 DMA after the 55-100 DMA and 55-200 DMA DeathCross, while medium to long term stochastics are far from any oversold band.

SPX FTSE Oct 14

 

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