BoJs Ueda sends Yen marching higher

Good morning

It was a fairly quiet day in the currency markets yesterday with pretty tight ranges seen in the majors, although after the London close we saw GBPUSD dip to 1.2570. We’d normally put this down to USD buying but GBPEUR was a few points lower as well, down at the 1.1665 area, so we could see this as GBP weakness rather than USD strength. It’s not a major issue, we are only talking about a few points really which make little difference in the scheme of things.

However GBP’s very slight fall against EUR comes despite ongoing talk of ECB rate cuts, not for December but certainly April 2024 is getting a lot of attention. Next week we have what should be a busy week, with Fed rate announcement on Wednesday and both ECB and BoE Thursday. Last year each central bank raised rates 50bps at their December meetings, this time we are looking at no change from any of them. The tone of their statements will be key, particularly with so much attention on possible rate cuts in 2024.

On the subject of rate announcements, BoC kept rates unchanged as widely expected yesterday, USDCAD hardly reacted at the time, ending the London session just 20 pips or so higher at 1.3580. Many see BoC as being one of the first major central banks to cut rates. We hear from BoCs Macklem and Gravelle later today, will be interesting to see if they continue with the mildly dovish tone.

Yen has had something of a recovery, with USDJPY trading down from a close yesterday around 147.35 to hit 145.15 this morning. BoJs Ueda was speaking, I didn’t think his comments were particularly hawkish, making it clear they will continue with easy monetary policy amid a very uncertain domestic economy. However his mention of the end of negative rates, even talk of putting rates into positive territory, has sent Yen marching higher. USDJPY is now at levels last seen in Sept 2023 and with talk of US rates having maybe reached a peak, and potential for higher Japanese rates, the market will be eyeing the summer lows in USDJPY which came in around 137.20.

Exactly this day last year I reported that Goldmans were calling the chances of a US recession as something in the region of 65%. While 2023 hasn’t exactly been a dream, the US has avoided a recession so far. Indeed, while we are not fully through 2023 yet, we do all seem to have got through what many were suggesting would be a very difficult year. It’s not been easy, but high interest rates and high energy prices didn’t send economies spiralling down as many had expected.

Plenty of focus on China recently, no surprise given it is the second largest economy in the world. China trade balance released overnight shows a surplus of US$68.4bn, some US$10bn higher than expected. USDCNY fixed below market levels once again at 7.1176, against market levels around 7.1600, Italy has officially withdrawn from China’s Belts and Roads initiative. It was a slightly odd move from Italy when it did sign up back in 2019, the only G7 nation to do so. The Italy u-turn comes just as EU’s von der Leyen is due to meet China President Xi. Von der Leyen has said China remains an important trading partner.

Not the busiest economic calendar today, we do have some US employment numbers today but markets really waiting for the US nonfarms tomorrow. Until then focus will be on USDJPY and whether this already significant move gains more traction.

- 10.00 EU GDP, employment change

- 12.30 US challenger job cuts

- 13.30 US initial jobless claims

- 17.30 BoCs Gravelle speaks

- 17.40 BoCs Macklem speaks

- 23.50 Japan GDP

- 07.00 EU HICOP

USD holds recent gains, EUR softer on rate cut thinking

Good morning

US Dollar had a bit of a push higher yesterday afternoon, helped by a better than expected ISM headline. GBPUSD broke through the 1.2600 area that had held for a week or so, trading down to 1.2580. It regained 1.2600 overnight but as I type we are testing below that level once again. Similarly EURUSD traded lower, it had been around 1.0830 yesterday afternoon but pushed quickly below 1.0800 and this morning we have seen further EUR selling which has taken the pair to 1.0775.

This morning’s move comes after some disappointing German factory orders numbers, which in turn follows dovish comments from ECB officials. GBP continue to make gains against the single currency, GBPEUR hitting 1.1690, almost 300 pips higher than the late-Nov lows around 1.1410. Current thinking seems to be that of Fed, BoE and ECB, it is the latter who is most likely to cut rates first.

Aussie GDP came out weaker than expected overnight but AUD has failed to react, AUSUSD up from yesterday’s lows of around 0.6550 to 0.6590, GBPAUD had traded up to 1.9260 yesterday but is back down now to the 1.9130 area. AUDNZD is down at 1.0680, lowest levels since mid-October and well off the 1.0940 highs we saw in November.

Moodys have upset China by downgrading their sovereign bonds to negative, citing concerns about their level of debt. China have said Fitch is using out of date property market data and fail to consider recent growth plans. Both S&P and Fitch have kept their ratings unchanged. There have been some reports of China banks selling USDCNY to prevent Yuan depreciation although at around 7.15 we are still well below levels seen through mid-August to mid-November. China still continue to fix USDCNY lower than market levels, it was set at 7.1140 this morning.

We expect BoC to keep rates unchanged at 5% at today’s rate meeting following some slight softening in economic data. Markets are looking for a rate cut from BoC sometime around the April 2024 meeting which will come around quickly enough, for now USDCAD is 1.3560, off the early Dec lows of 1.3480 which also marked the lowest levels since September.

Boris Johnson appears before the Covid inquiry later today. I cannot say the government did everything right during Covid but overall I’m never going to argue against their response and actions through the pandemic, other than as readers back then will know, I thought the lockdown should have come sooner and incoming flights should have been stopped, particularly those from China. All very easy to criticise in hindsight, particularly if you trawl through the wording of every text message and email. Some difficult decisions were made and it really was a no-win situation.

My only suggestion that I still think would have helped would have been to have a strict lockdown of two weeks each three months or so. Given the incubation of the virus was around ten days, this would have stopped much of the spread of the virus without having to have extended lockdowns. Anyway, no doubt Johnson will get a good going over today.

Arsenal extended their lead at the top of the Premier league with a late winner from Declan Rice over Luton, the match finished 4-3 to Arsenal, Luton will be kicking themselves for conceding a late goal. Several matches this evening and Spurs will be hoping to get back to winning ways when they take on West Ham tomorrow evening.

In the meantime we’ll be watching the BoE financial report this morning and then the US ADP employment numbers this afternoon. As you know, this is an unreliable indicator for US nonfarms but is closely watched nevertheless and does have the ability to move the currency markets.

- 10.00 EU retail sales

- 10.30 BoE financial stability report

- 11.00 BoE press conference

- 13.15 US ADP employment

- 13.30 US unit labour costs

- 15.00 BoC rate announcement

- 15.00 CAD Ivey PMI

- 00.30 AUS trade balance

- 03.00 China trade balance

- 07.00 German industrial production

USD unwinds some recent losses, focus on US data this afternoon

Good morning

A bit of a turnaround in the currency markets yesterday with US dollar pushing a bit higher through the afternoon. GBPUSD traded down to 1.2605, EURUSD to 1.0805, leaving GBPEUR at 1.1665, the single currency not helped by ECBs Schnabel who said further rate rises are unlikely after Novembers inflation report. ECB inflation expectations are due out this morning, look for a drop in the one year expectation from 4% to around 3.8%, while the 3 year rate could remain steady at 2.5%.

USDJPY pushed up from 146.50 to 147.45 yesterday but has drifted back to 146.80 despite Japan inflation numbers coming out softer than expected overnight. And gold has settled back to a more comfortable $2035 after its spike higher Sunday evening.

UK Chancellor Hunt has described the UK economy as having a sprained ankle, rather than the broken leg that had been suggested previously. He believes the changes made in the Autumn statement will help bolster growth.

RBA left rates unchanged at 4.35%, they sounded less hawkish than many had expected, saying there were signs inflation is continuing to moderate and warning of an uncertain outlook for the Chinese economy, as such AUD is a bit lower, GBPAUD now up at 1.9180 having reached a high overnight of 1.9220 following the announcement. A couple of major banks are still bullish on AUD, more AUDUSD though and seem happy to go long in the 0.65’s (currently 0.6580) looking for 0.68+. Below 0.6500 I think they may have to rethink.

In other news, Ryanair seem to have really surpassed themselves this time with the introduction of a new procedure for travellers who do not wish to pay to reserve a particular seat on their flight. In the past, travellers could choose to pay the fee to book a ticket or not, and them print or download their boarding pass accordingly. Now it appears that those not willing to pay the fee will not be able to print or download their boarding pass, but will have to queue at the airport to receive it. Now, I have no problem in firms finding new ways of making money but this really seems to force customers into a difficult choice of paying or queueing, which doesn’t seem particularly fair.

Mind you, its probably small fry compared to my favourite gripe at the moment, the UKs water companies, who have failed over the years to invest in their infrastructure but have instead paid huge dividends to their shareholders. Over this time they have at times been pumping raw sewerage into our rivers and seas, which I think we can all agree is pretty disgusting, as well as damaging to health and environment. Thames Water has now said that it will take time to improve services while managing its £14.5bn debt. How can a firm in so much debt pay money to shareholders? Only one thing for it, our prices will be going up. I do regard it as an absolute travesty that firms are allowed to act in this way, verging on criminal.

Enough of my moaning for one day! Time to calm down, settle back and see which way the markets take us today. With US ISM and JOLTS job data this afternoon we cannot rule out more USD volatility, uh to have a crystal ball….

- 09.00 ECB inflation expectations

- 09.00 EU composite PMI

- 10.00 EU PPI

- 14.45 US S&P composite PMI

- 15.00 US services ISM, JOLTS job openings

- 00.30 AUS GDP

- 07.00 UK BoE Financial Stability Report