Testing the yen

April 11, 2016

There is currently a stand-off on the yen between the market and the Japanese authorities and for the moment, the market is winning hands down. Thanks to Friday’s late yen gains, USDJPY has now been falling for seven consecutive sessions (including today). There are two reasons why the market appears to have the upper end. Firstly, we’ve not seen any MoF or BoJ officials coming out hard on the currency, the latest comments coming from the Chief Cabinet Secretary Suga, who merely repeated that they are watching the market with vigilance and would take action as necessary. There were similar comments from BoJ’s Kuroda. Secondly, on many measures the yen is hardly over-valued in the bigger picture, which undermines the case for more aggressive action. For now, it’s more the speed of the move that is the issue, rather than the level, so it’s hard to put a “line in the sand” on USDJPY below which intervention prospects would rise significantly. Stocks have also been catching up with the latest yen moves, Japanese stocks are down overnight against a mostly positive tone in Asia and especially in China.

Elsewhere overnight, we’ve seen steady CPI data from China, the headline rate holding at 2.3%. Food prices were firmer and forward indicators suggest that could be more to come, with PPI data coming in firmer than expected, although still negative at -4.3% YoY (from -4.9% in the previous month). We see UK inflation data tomorrow and the Bank of Canada rate decision comes on Wednesday. We’re not expecting rates to be cut at this meeting, but as always the indications from the statement will be scrutinised for the potential later this year. Elsewhere, all things considered, the single currency continues to perform fairly well, holding its ground against the dollar and outperforming a still suffering pound. For EURUSD, initial resistance comes at 1.1454/95. Sterling managed some recovery into the end of last week, but structurally remains a weak currency in the second quarter, given the bulging current account deficit and looming EU referendum in June

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