A covert operation by Central Banks to weaken their own currencies will never be admitted. However, the depreciation race remains healthy -- just look at the CHF and JPY outright and on the crosses. The Japanese are firmly holding on to the depreciation “baton.” Now that global economics is giving the investor the perception that all may be looking brighter, it too is giving the BoJ and the new Abe government a window of opportunity to weaken their own currency without the investor demanding it for "surety" reasons. The yen continues to weaken outright this morning after Japan launched new measures to stimulate their own economy overnight.
The Japanese government has approved a new +¥10.3t emergency stimulus package to prop up their ailing economy. Abe and his government have promised to strengthen ties with the BoJ to defeat deflation and support their own economy. This course of action raises expectations for further aggressive policy actions to follow. The new government said that around +¥3.8t will be for "disaster prevention and reconstruction," with +¥3.1t directed to stimulating "private investment and other measures." Analysts have calculated that the extra spend could increase Japanese GDP by +2%, and possibly create a further +600k jobs.
After falling to multi-year lows against most of its major trading partners, that includes the dollar hitting its highest level in two-years after the wider than expected Japanese current account deficit reported overnight (-¥222.4b current account deficit in November compared with a +¥376.9b surplus in October), the yen is stabilizing somewhat now that trading is moving back towards the Americas.
Do not be surprised to see investors looking at more risk positive trades, especially now that the "contrarian" position taking has proven expensive this week. The recent ECB and BoJ policy statements have reduced the likelihood of a eurozone rate cut and has increased pressure on Governor Shirakawa at the BoJ to take further action. However, uncertainty is dominant stateside, ongoing discussions of the U.S. borrowing limit and spending cuts still remain unresolved. The fiscal cliff deal passed in the New Year, has somewhat resolved the U.S. uncertainty over taxes, but has left the "spending" leg outlook unresolved. Despite market risk being embraced somewhat, in the background there is a fine "timeline" in play before market uncertainty again trumps risk trades. With the U.S. spending cuts being postponed for only two months, and a debt ceiling needing to be raised next month, the focus on news reporting will very much dictate the position and directional trade. Sometimes economic fundamentals are not enough to sway investor trading-part of that is left to irresponsible news reporting or scaremongering!
Released data this morning has managed to hurt sterling again. The U.K.’s manufacturing output slumped, falling -0.3% in November from +2.1% in October, and the IP print was much weaker than anticipated (+0.3% in November, but fell -2.4% y/y). The ECB position has managed to put GBP on the back foot. EUR/GBP momentum remains positive, adding to the overall recent upside potential. The market continues to see value on dips in the cross, preferably looking to enter a new or add to current positions closer to the figure, 0.82.
Even those looking for a firmer "single currency" the rapid rise in the EUR/CHF has taken many participants by surprise. Are we witnessing the emergence of a possible new EUR/CHF trend? The element of “surprise” has managed to drive the move higher and triggered the writing of new bullish technicals, which will only convince more buying. Unlike the unwinding of other safety trades, USD/JPY, the offered bias of EUR/CHF up until yesterday would suggest that safe-haven inspired longs remain to be unwound. The psychological CHF 1.22 benchmark could be the watershed divides and the trigger points for a mass "surety trade" unwind.