Nowadays, the forex market cannot be choosey; it will take any volatility that’s on offer. Today’s currency moves have mostly been guided by central bank decisions and rhetoric. The Bank of Japan (BoJ) and Bank of England (BoE) have not failed in their respective jurisdictions in that regard. Both the yen and sterling are being supported, like it or not, by a potential change in future monetary policy or lack thereof. The BoE’s support is a tad different as the market was looking for Monetary Policy Committee (MPC) dissent rather than uniformity and they have not been disappointed.
For some BoE members, the time for raising interest rates in the U.K. is getting closer. Today’s highly anticipated release of the minutes from May’s MPC meeting indicated that the nine-member panel voted unanimously to keep the benchmark interest rate at a historic low +0.5%, and the size of its bond portfolio at £375B. However, the minutes also recorded that there was a range of views from the MPC members over how much ‘slack’ there was in the labor market “to bear down on inflation and what the best strategy is for eventually raising interest rates.” The minutes show divisions on estimates of spare capacity. “The committee would continue to refine its views as the economy evolved, and for some members the monetary policy decision was becoming more balanced.” This is definitely a sign that some officials are moving closer to reassessing their ultra-low-rate policy stance.
English Policymakers Warming to Rate Hike
BoE Governor Mark Carney has gone out of his way to stress that he is in no rush to tighten U.K. monetary policy, citing age-old central bank reasons that inflation remains subdued and wage growth weak. In Carney’s view, there are too many individuals still unemployed and underemployed. The fixed-income market continues to price in the first rate hike early in the first quarter, 2015. However, the MPC minutes suggest that a minority could begin pushing for an earlier rate hike, perhaps as soon as the end of this year, especially if the economy continues to grow as strongly. BoE staff predictions expect the economy to expand at a faster pace in the second quarter (+0.9%) than in the first quarter (+0.8%). The potential dissenters believe that to meet the Bank’s aim of lifting rates “gradually,” the earlier the BoE needs to start.
Providing support for stronger U.K. growth is the April retail sales print. It has come in considerably stronger-than-expected, the strongest in a decade, with a +1.3% headline print compared to +0.5% expected. Ex-fuel, the gain was +1.8% compared to +0.5% forecast with an upward revision to the previous month’s print as well. It was the strongest year-on-year gain since May, 2004, growing +6.9%. Along with the first set of minutes under the forward guidance II framework, the market should be expecting the hawks to get louder, especially with more economic prints like this one.
With respect to GBP, it’s about “buy the rumor, sell the fact.” Cable’s initial reaction was to extend gains north on a very strong U.K. sales print (£1.6922 – a 12-day high). Against the EUR, sterling managed to hit a fresh 16-month high of £0.8103. However, profit-taking on long positions has helped to deflate cable from its highs to current support levels (£1.6885). For now, the market can expect GBP bulls to run into some pre-£1.70 resistance around £1.6939 and £1.6975.
Steady As She Goes in Japan
So far, the yen has been the other big shaker in the overnight session. The JPY managed to climb to a three-month high (¥100.81) earlier this morning after the BoJ concluded its own policy meeting by signaling that it saw little need to implement further monetary stimulus any time soon.
The yen, a go-to safe-haven currency, has been the risk-off currency must have this week, particularly against currencies such as the Aussie and Kiwi (trading at two-month lows, AUD/JPY 93.22 and NZD/JPY 86.58). The currency continues to be supported by investors’ broad retreat from riskier assets. The lack of policy action and no hints of further additional easing from Governor Haruhiko Kuroda will continue to provide short-term support for the yen. However, do not underestimate Kuroda, who sees no reason why the yen should be strengthening – he and his fellow policymakers remain on alert following the recent gains in the currency. He is the central banker that has supported using yen for funding the “carry trade.” A strong yen does not make Japan’s export-driven economy competitive. The yen’s recent strength brings February’s base ¥100.75 into sight and will now maintain a strong intraday resistance target at ¥101.15.
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