Vantage FX | Will Abenomics push USDJPY higher? EURGBP to head lower | 22 July 2013

July 22, 2013

Recap

Technology shares were under pressure on Friday but Bank reports managed to push the S&P up for a new all-time closing high – again. Stocks in Europe didn’t fare so well and rates across the continent were a little lower while those in the US were largely flat.

The US dollar recovered some early lost ground against the Aussie and yen but Euro and GBP were mostly stronger.

Gold is back up near $1300 and Nymex crude has closed the gap on Brent and sits well atop $108 and may be headed to $114 Bbl.

Over the weekend we have had a decent sized earthquake in Wellington, the New Zealand Capital, a resounding reaffirmation of Abenomics in the Japanese Upper House election and a G20 Communique on Saturday that will reinforce his hand and likely undermine the Yen further

Abenomics gets a shot in the arm

Shinzo Abe left his office as Japanese Prime Minister 6 years ago as a failure on Sunday however he returns triumphant after the resounding victory of his LDP and coalition partners in the Upper House Elections which have delivered him and his partners control of both houses of Parliament and with that control in a manner that reinforces and support his plans for aggressive monetary accommodation for the Japanese economy.

And why wouldn’t the electorate endorse him – just check out the chart at right which is the Citibank Japanese Economic Surprise Index. This index measures the “surprise” in the data against what the market or punditry expected. As you can see the data has been much better than expected over the past few months and I would also note now that some of the data has actually been outright good for an economy that has been in the doldrums for so long.

Indeed the G20 Communique seems to have given succour to Abe’s self interested policies no doubt taking the line that a stronger Japan is better than a weak Japan at a time that China is going down the internal rebalance path itself. The G20 said,

There are signs of strengthening activity in the U.S. and Japan…

Monetary policy should be directed toward domestic price stability and continue to support economic recovery according to the respective mandates of central banks.

Tick? It’s ok for the Japanese to target 2% inflation. The G20 also noted that they were mindful of unintended consequence but in a swipe at China and a reinforcement of the Japanese position the G20 said,

We are determined to accelerate progress toward rebalancing global demand, including internal rebalancing through structural reforms. This requires surplus economies to boost domestic sources of growth and deficit economies to increase national savings and enhance competitiveness. We reiterate our commitments to move more rapidly toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments.

SO the Nikkei is likely to get a lift and the USDJPY should try to break a little higher this week.

While above 0.9980 Dollar Yen is biased toward 103.30/60

Kiwi Capital hit by 6.5 magnitude earthquake weighing on NZD

I don'[t often talk about the Kiwi in the morning note because there is so much other stuff to talk about but it worth mentioning the earthquake over the weekend that hit Wellington the New Zealand Capital and its potential impact on the Kiwi and the Aussie dollars.

If you’ve read Nate Silver’s book “The Signal and the Noise” (link here in the books that made me a better trader) you will know how difficult it is to predict Earthquakes with any accuracy – apparently its even harder than economists forecasting FX rates (just joking – nothing is that hard). But what he does show is that quakes cluster so there is a chance that this quake is followed up with another bigger one sometime soon. Now there is probably no better prepared city on the Planet than Wellington for such an event and I remember when I was Head of Currency Strategy at NAB going to the BNZ office in Wellington and being told about the way the building at Lambton Quay “floats” on a big cushion. But it is worth mentioning for traders of Kiwi and potentially Aussie as a liquidity source, that a big earthquake might see the NZDUSD dislocate a little so stops should be kept close.

Now of course we hope that the aftershocks over the weekend are where it ends but this FX stuff is a Keynsian Beauty Parade so we have to keep an eye on what other investors and traders are keeping an eye on and thinking.

Looking specifically at the Aussie as you know I think the RBA should cut rates given the economic backdrop particularly given household restraint and the business outlook and I think that the CPI on Wednesday is likely to reinforce that they have room to cut as soon as next week if they want to. I looked at the outlook for inflation in this week’s Newsletter (sign up and I’ll send you the password). SO Wednesday is a big day for the Aussie but as you can see in the chart below it remains in its Box. We’ll trade inside until we see a break either way.

On other FX markets the Euro remains mid range for the last week at 1.3135, GBP has pushed up though and if it breaks through 1.5303 it should be off and running. Looks like EURGBP is going to be a good short from here targeting 0.8497 initially and then 0.8394.

On the stock market one of my systems was stopped into a long on the S&P 500 at week’s end and I discuss the setup, target and stop loss in the weekly. It’s a marginal high and not supported by the Dow or other bourses around the globe but a system is a system.

Anyway at the close the S&P 500 was up 3 points or 0.16% to 1692, the Dow was down 5 points which is essentially flat at 15,544 and Nasdaq fell under the weight of tech stocks like Microsoft which fell 12% (another reason I trade FX not individual stocks) to close down 0.64% at 3558.

In Europe the FTSE was flat, as were the CAC and DAX, Milanese stocks rose 0.44% and in Madrid stocks fell 0.18%.

Data

It’s really just a bit of US data with the release of the Chicago Fed national activity index and existing home sales.

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