USD/JPY has come under downside pressure as EUR/JPY feels the heat ahead of the ECB press conference and speculation that ECB Governor Trichet will talk about the EUR cross after the Bank delivers the widely anticipated 25bps hike in interest rates to 3.25%..
USD/JPY will remain in the hands of EUR/JPY through today and we could see this pressure continuing ahead of the conference and also post conference, if Trichet like other European officials does voice his concern over the overvalued nature of EUR/JPY, according to a report by BNP Paribas.
Nonetheless, BNP Paribas point out that sustained gains in the JPY are very much dependent on the yield curve and hence official commentary will only have a temporary and limited impact. In fact, this morning had the first of the reports from Japan’s Lifers.
Daiichi Life said that it would like to buy more domestic bonds but that it is dependent on if 10-year JGBs would approach the high end of its forecast range (1.6-2.1%).
While absolute yield is important, relative yield differential between US and Japanese bonds are likely to narrow further implying that the level of bond outflows will not rise significantly or even at all. While this is theoretically JPY neutral, the developments in the JPY will be in the hands of how these Lifers plan to hedge their foreign investments. US yield curves are an integral part of how the JPY performs medium term. Significant curve steepening is yet needed for the JPY to push sustainably higher.
The Japanese security flow data showed a strong inflow to Japan in the week ending the 30 September. Japanese investors were net sellers of Y825.6bn of foreign assets and
foreign investors were net buyers of Y673.5bn of Japanese assets.
EURJPY has pulled back from the early week highs, but the 150.45 level on a mid-point basis remains the critical level to watch. A break of this is likely to yield a quick move to 153 and beyond, while if this level holds, then we may see a correction back to the lower band of the recent range, above 148.00.
In the US, the market ISM services headline index dropped sharply from 57.0 to 52.9 in September. This came much weaker than consensus forecasts for a 56.0 reading. Nonetheless, improvements in the employment and new orders components offset this negative news. Furthermore, while Bernanke noted that there was a “substantial correction” in progress in the US housing market, he also emphasised that the Fed was unhappy with the current rate of inflation. This morning, Fed’s Kohn told the market quite clearly that it should not sell the Fed’s inflati8on concern short. He noted concern if inflation were moving higher and that it was important to keep inflation well contained. The USD is likely to retain stability on the back of these comments as well as ahead of tomorrow’s employment report.
USD/CHF continues moving higher as there is no sign as yet that current extreme risk appetite is being reduced. The Dow Jones has moved above its January 2000 high and investors seem to be busy looking for cheap funding to leverage positions further within a low yielding environment.
