Just a breather for the Yen, or something more fundamental?

Monday 11th July 2016

  

Just a breather for the Yen, or something more fundamental?

ref :- "Yen Drops Most in Two Weeks as Abe Plans to Add Fiscal Stimulus" , Bloomberg Markets

For the time being and for some fairly obvious post-Brexit reasons, we'd better leave the British Pound to one side when we generalise about foreign exchange markets. Sterling is marching to the tune of its own bedraggled drummer just now and this morning is suffering from the likelihood of a rate cut on Thursday. One might reasonably ask just how much difference a move from 0.5% to 0.25% can be expected to make to an economy that may need all the love it can get for a while. The fact remains however that the Bank of England (doing a reasonable job in very difficult circumstances so far) will probably take the view  that it needs to be seen to be doing something immediately, even if it's still too early to be sure of Brexit's full impact. Fair enough ...... though it may well be that given BoE boss Mark Carney's known scepticism towards negative rates and the lack of available cutting room, further QE or programmes like the Funding for Lending initiative may prove to be the preferred method of providing stimulus in the future (assuming it's needed, of course !).

Anyway, enough of that ..... we were going to talk about the Yen. If there was an initial move to push the Dollar higher after Friday's US payrolls number,  the effects were muted at best. The lack of wage inflation pressure represented by the soft Average Hourly Earnings number probably accounts for the lack of follow-through Dollar buying this morning ..... except against the Japanese unit, that is. USD / JPY is trading at 102.40, up from 100.65 on Friday and the move comes as a result of the victory of PM Shinzo Abe's ruling party in upper-house elections.

The way is now clear for Mr Abe to press ahead with a stimulus package that according to some may amount to 20 trillion yen ($98 billion). This number looks toppy but a figure slightly north of 10 trillion yen is definitely on the cards and the package will embrace both further fiscal and monetary stimulus .... in other words, projects like high-speed train construction on the one hand and an expansion of bond and equity purchase programmes (QE) on the other. These prospective asset- purchasing measures point to even lower yields in Japan and have led to one or two USD / JPY bulls to call for 110.00.

Dollar bulls have had to be pretty patient .... and some of them will have had to withstand some pretty expensive reverses too. The pair traded through 99.00 in the immediate post-Brexit panic and Japan's big current-account surplus means that the Yen has been the currency most in demand as a safe-haven all year. Does the imminent stimulus package, and perceptions in some quarters that the Yen may be overbought, signal a turnaround in USD / JPY? The argument makes sense ..... but unfortunately so does the alternative view :  Yen strength is largely a function of its safe-haven status, and if there's one thing for certain it's that there is absolutely NO shortage of potential crises in today's world ..... there are two in the offing in Italy alone. 

At the start of the year, many thought that Japan's move to negative rate territory would lead to Yen weakness ..... in the event, when anxiety levels started climbing the whole rate divergence theory was forgotten and Yen weakness could not have been further from the truth. If anything, uncertainty meant that the interest rate story holding sway was the one that said that US rates would stay longer for lower in such a precarious global environment. When it comes to buying USD / JPY again, some may find that lesson hard to ignore.