A mixed bag

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Although volatility in currency markets remains muted, some interesting cross-currents have been emerging. As we observe below, the yen has been quietly sliding in recent trading sessions, and thus far in August it is the worst-performing major currency. At the other end of the league table is the Canadian dollar, which has been helped by both higher interest rates and the rising oil price.

The latter is likely to stay elevated given the growing tensions in the Middle East, and so we can reasonably expect the CAD to retain a healthy bid in the near term. Elsewhere, the pound is looking a little more solid this week after some perky pieces of economic data. Cable traded above the 200d moving average yesterday, with the 100d moving average not that far away at 1.5756.

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It will be interesting to see whether cable can sustain a move above the former – this will be the fifth test in the past three months. On the previous four occasions, cable failed to penetrate in a meaningful way and subsequently fell back. Finally, the euro had a remarkably good day yesterday, at the same time as the Aussie fell back through 1.05. Evident over the past couple of days has been some liquidation by EUR/AUD shorts – this cross is now up at 1.18, a three-week high. This cross has been a popular one amongst the hedge fund and trading community; as such, it could be that some are deciding to take their winning chips off the table after a stellar run over the past three months.

Commentary

The yen’s about-face. Against an otherwise sedate backdrop in currency markets, of interest has been the slippage encountered recently by the Japanese yen. A couple of factors help to account for the change of fortune. Firstly, the most recent set of BoJ Minutes suggested that some Board members could be convinced to vote for further monetary stimulus sooner rather than later. Secondly, and more importantly, interest rate differentials between Japan and other major markets have widened markedly in recent weeks. The US 10yr yield has jumped by 45bp over the past three weeks to 1.83%, a 3mth high. Similar increases in longer-dated yields have been recorded in other major bond markets such as Germany, Canada and Australia. In contrast, Japanese bond yields have barely moved. In response, USD/JPY is now comfortably above 79.0 which will no doubt please Tokyo. The yen has lost nearly 3.5% against the Canadian dollar this month, 2% against the single currency and 1.5% vs the Aussie. If interest rate differentials continue to move wider in the short term, then the yen will weaken further.

More British cheer. Perhaps the UK economy is not stuck in reverse after all. Following Wednesday’s eye-popping news on employment, there was further cheer yesterday in the shape of relatively decent retail sales. June retail sales were revised up significantly (to +0.8% from +0.1% previously), and this was followed by a further 0.3% increase last month. Recent manufacturing and construction data imply that the initial estimate for Q2 GDP of -0.7% will need to be revised higher. In YoY terms, nominal retail sales rose by 2.8%, implying some slight growth in real terms. Sterling naturally responded positively to the news, with cable jumping up through 1.57.

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