GBP JPY BUY (POUND STERLING - JAPANESE YEN)
GBP
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact. The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet. Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
4. CFTC Analysis
GBP saw another sizable build in positioning (+7156) with the most recent CFTC data updated until 10 August. The build excluded the huge pop higher after the Dollar’s flush lower on Friday following weak consumer sentiment data. Current levels for Sterling still look attractive for medterm buyers, especially with the positioning seeing quite a flush lower in the past few weeks. With a light calendar ahead for Sterling this week, we are mostly likely going to see majority of influence coming from movement in the USD.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD after the solid ISM Services, NFP and Fed comments from the week before and provided a good opportunity to trade the USDJPY higher going into the CPI print. However, we took profit when Core CPI MM came in slightly softer. After the print the Dollar softened (also driven by strong pre-positioning), and the move was exacerbated on Friday when yields saw some chunky downside as well. The med-term outlook remains down for the JPY, but it’ll be important for us to see whether yields can keep up its upside momentum and of course we’ll need to keep an eye on overall risk sentiment as well, especially heading deeper into August and its typical summertime volatility .
3. CFTC Analysis
The JPY remains the biggest net short among the majors with yet another sizable increase in net-shorts (-5467) with the latest CFTC data updated until Tuesday 10 August. The JPY has failed to take much advantage of the wash out in treasury positions and a drop to 1.12% in US10Y over the past few weeks. The flush lower in both US10Y and the USD on Friday saw some mild reprieve for the JPY as USDJPY rotated back towards key levels of technical support after a solid run higher at the start of the week. The bias for the JPY remains driven by the overall risk sentiment and movements in US10Y , which means seeing how the market decides to trade after Friday’s surprisingly big drop in US consumer sentiment will be important for the JPY as any big risk off flows should provide support for the currency in the short-term, while a recovery in yields and overall sentiment should put pressure on the safe-haven.
FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.
2. The Monetary Policy outlook for the BOE
The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact. The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet. Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.
3. The country’s economic developments
Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling.
4. Political Developments
Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.
4. CFTC Analysis
GBP saw another sizable build in positioning (+7156) with the most recent CFTC data updated until 10 August. The build excluded the huge pop higher after the Dollar’s flush lower on Friday following weak consumer sentiment data. Current levels for Sterling still look attractive for medterm buyers, especially with the positioning seeing quite a flush lower in the past few weeks. With a light calendar ahead for Sterling this week, we are mostly likely going to see majority of influence coming from movement in the USD.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Safe-haven status and overall risk outlook
As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.
2. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD after the solid ISM Services, NFP and Fed comments from the week before and provided a good opportunity to trade the USDJPY higher going into the CPI print. However, we took profit when Core CPI MM came in slightly softer. After the print the Dollar softened (also driven by strong pre-positioning), and the move was exacerbated on Friday when yields saw some chunky downside as well. The med-term outlook remains down for the JPY, but it’ll be important for us to see whether yields can keep up its upside momentum and of course we’ll need to keep an eye on overall risk sentiment as well, especially heading deeper into August and its typical summertime volatility .
3. CFTC Analysis
The JPY remains the biggest net short among the majors with yet another sizable increase in net-shorts (-5467) with the latest CFTC data updated until Tuesday 10 August. The JPY has failed to take much advantage of the wash out in treasury positions and a drop to 1.12% in US10Y over the past few weeks. The flush lower in both US10Y and the USD on Friday saw some mild reprieve for the JPY as USDJPY rotated back towards key levels of technical support after a solid run higher at the start of the week. The bias for the JPY remains driven by the overall risk sentiment and movements in US10Y , which means seeing how the market decides to trade after Friday’s surprisingly big drop in US consumer sentiment will be important for the JPY as any big risk off flows should provide support for the currency in the short-term, while a recovery in yields and overall sentiment should put pressure on the safe-haven.