Good morning
The long-awaited US inflation data was released yesterday, coming in a smidge softer than expected at 3.0% headline and 3.3% core, certainly enough for the market to be more confident about a September rate cut and to send the US dollar lower. GBPUSD, at a fairly heady 1.2875 before the release, pushed up to 1.2950, while EURUSD moved up from 1.0845 to 1.0900. There was a lack of follow-through, both GBPUSD and EURUSD are off the highs at 1.2910 and 1.0865, but bear in mind we started July in the mid-1.26s and low-1.07s, we do have a considerably weaker USD now than we had a week or two ago.
A key mover yesterday was Yen. It was trading up at 161.50 just before the US inflation number, soon after it hit 157.50 before settling back at 158.60. Now, I’ve seen nothing official and Japan haven’t confirmed but I think this is more down to intervention that just some timely unwinding of long positions. The initial move after the release took the pair to just 160.80 or so, the next 300 pip move lower came a few minutes after. Overnight USDJPY drifted back up to the 159.40 area, but market talk of BoJ checking FX rates took the pair back below 158.00 briefly, although it has since regained 159.00, now 159.25.
Worth noting that for a long time the major players have been saying that until Fed cuts and Japan raises rates, USDJPY will remain elevated. The potential for a Fed rate cut in September is perhaps worrying those who have spent a long time building long USDJPY positions. Could we be seeing the start of a great unwind or is this really just more intervention?
It has been pointed out that Japans last intervention in early May came on the back of a dovish FOMC, this time it seems to have come on the back of softer US CPI. I wonder if this is a new plan for Japan, to let USDJPY run until we see weak US data, and then jump on the back of the USD selling, exaggerating the move. Sensible ploy if you ask me. It does mean US data releases could become bigger events if the market thinks Japan could be ready to pounce. It is difficult to find the right timing for intervention plays, Japan may be making that slightly easier.
Really tempted to start building, very gradually, a long-term short USDJPY or GBPJPY position, the problem is the forward points are so against us. Each month in GBPJPY, the forwards are around -100 pips, making it expensive to hold unless there is a significant decline. We’d need a few more days like today to make that worthwhile.
Today we have the US PPI number, another inflation figure that is less watched than CPI but is quite capable of moving the market nonetheless. A 2.3% headline and 2.5% core are expected, both a touch higher than last month. A surprise to the downside could give USD one more push lower before the weekend, with 1.3000 a possible target in GBPUSD, a level that we’ve not seen for almost exactly one year. A softer reading could also trigger further intervention in Yen. Of course, the reverse is true, and a firmer reading could give the USD shorts reason to close positions into the weekend.
Speaking of the weekend, it another big one for sports. There is a cricket test match going on, England v West Indies. I remember as a kid the West Indies would be a fearful opposition. Not so now it seems, they were all out for 121 in their first innings and were 79/6 at the close, still 171 runs behind and England’s first innings total of 371.
England take on the might All-Blacks again in the rugby tomorrow morning, looking to get revenge for the one point loss last week. Wales take on Australia shortly after, with South Africa v Ireland in the afternoon.
Wimbledon tennis finals take place over the weekend, with the men’s semi-finals today.
In football, there is no third/fourth play-off for the Euro’s, can’t really blame them, no one really likes them anyway, do they? The big event of course is Sundays final between Spain and England. Can England overcome a slick-looking Spanish side who have beaten Germany and France to get to the final? I certainly hope so! Did read a worrying statistic earlier though. Since 2001 Spanish teams have played in 22 major finals, such as Champions League, Europa League etc, against non-Spanish teams. The Spanish sides have won all 22 finals. We’ve got quite a job on our hands.
The weather looks bit better over the weekend than had been forecast earlier in the week. Still not much warmer than 20°c but I’ve given up hoping for anything higher, I’ll settle just for it to be dry. A typical British summer then.
Have a great weekend as and when it comes. Enjoy the football. Unless you’re Spanish of course!
Richard
- 13.30 US PPI
- 15.00 US Michigan sentiment survey
Comments