GBP
FUNDAMENTAL BIAS: WEAK BULLISH
Monetary Policy
They did it again! After leading markets to believe that a Dec rate hike was looking unlikely the bank surprised by announcing a 15bsp rate hike. Recall we had external member Saunders (who voted for a hike in Nov) suggested there could be benefits in waiting before moving on rates until some of the uncertainty from Omicron dissipates. We also had BoE’s Mann a few days before the meeting saying it was premature to talk about hikes but ended up voting for a hike with an 8-1 vote split and BoE’s Tenreyro the only dissenter. The bank lost a lot of the credibility that it had left, but in the end, they did the right thing (in my opinion at least) to stay data dependent and hike given the recent flurry of much better-thanexpected econ data. The consensus view was that current price pressures warranted tighter policy in the near-term, with inflation expected to peak close to 6% in April (up from previous projections). One negative was of course growth which is expected to push lower given the Omicron variant and associated
restrictions. For now, the bank’s move is a hawkish development for the GBP, with Omicron and incoming data key considerations for the rate outlook going forward (a 25bsp hike is fully priced for March).
Economic & Health Developments
Even though activity data has been slowing, the economy is not expected to fall off a cliff by any means. Growth expectations for 2022 still places the UK in front of the G7 which means growth differentials are still favourable for the GBP. It seems like the solid economic data (beats for CPI, Jobs, Retail Sales) were enough to convince the BoE to hike, and as long as the data remains firm it should keep the odds of additional tightening on the table. Focus now turns to Omicron to see how it impacts incoming data and affects the rate outlook going into 2022.
Political Developments
Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Furthermore, political uncertainty
surrounding PM Johnson and the lack of trust from his own party opens up another can of worms for Sterling (the currency usually doesn’t perform well when the future of a PM is brought into doubt), and that remains a driver to watch in the sessions ahead.
CFTC Analysis
Latest CFTC data showed a positioning change of +11548 with a net non-commercial position of -39171. It seems like both price action and positioning has caught up with the BoE’s hike in December with Sterling putting in a decent week of gains and positioning also seeing a sizeable reduction in net-shorts.
The Week Ahead
In the week ahead it’s quiet on the data front for the UK once again with GDP the only real data point of concern but we are not expecting much from it. Arguably one of the bigger drivers for the GBP will be what happens to overall risk sentiment as well as the USD. As a currency with a slightly higher beta, the Pound can be sensitive to overall risk sentiment so keeping track of how equities markets are doing will be important. Furthermore, even though we maintain a bullish view on Sterling, the recent run higher has been rather one-sided, and we are inching closer towards some very key technical resistance levels around 1.3600. One possible trigger that could see GBPUSD break through that though is Wednesday’s US CPI. After the push lower on Friday, the DXY broke through key support, and a big miss in CPI which means less need for very aggressive Fed policy is not a good look for the USD.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon.
2. 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 for the JPY; and although monetary policy expectations can still prove marketmoving 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 ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. As the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support is being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic directional moves in the JPY, as long as yields play their part.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares a strong inverse correlation to 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 isn’t perfect and will ebb and flow depending on the type of market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher
while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in the USD of course.
4. CFTC Analysis
Latest CFTC data showed a positioning change of -9160 with a net non-commercial position of -62262. Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large speculators and leveraged funds always increases the odds of more punchy safe haven flows and mean reversion when risk sentiment deteriorates. However, despite risk sentiment taking a hit in the past trading week, the JPY has remained pressured as the move in US yields kept any JPY rallies in check.
5. The Week Ahead
In the week ahead the biggest focus for the JPY will be on overall risk sentiment with the big rally in risk sentiment going into the last few trading days of the year with S&P futures managing to squeeze out another all-time high and Nasdaq futures getting very close to doing the same. The big amount of upside has been mostly attributed to equities taking the path of least resistance ( med-term bias remains tilted higher) and moves was probably exacerbated by thinner liquidity and lower volumes. If that momentum can continue at the start of the new year, we can expect to see further downside for the safe haven JPY and will be a key focus for the currency for the week ahead. Apart from that, keeping an eye on US yields will be important as always.
FUNDAMENTAL BIAS: WEAK BULLISH
Monetary Policy
They did it again! After leading markets to believe that a Dec rate hike was looking unlikely the bank surprised by announcing a 15bsp rate hike. Recall we had external member Saunders (who voted for a hike in Nov) suggested there could be benefits in waiting before moving on rates until some of the uncertainty from Omicron dissipates. We also had BoE’s Mann a few days before the meeting saying it was premature to talk about hikes but ended up voting for a hike with an 8-1 vote split and BoE’s Tenreyro the only dissenter. The bank lost a lot of the credibility that it had left, but in the end, they did the right thing (in my opinion at least) to stay data dependent and hike given the recent flurry of much better-thanexpected econ data. The consensus view was that current price pressures warranted tighter policy in the near-term, with inflation expected to peak close to 6% in April (up from previous projections). One negative was of course growth which is expected to push lower given the Omicron variant and associated
restrictions. For now, the bank’s move is a hawkish development for the GBP, with Omicron and incoming data key considerations for the rate outlook going forward (a 25bsp hike is fully priced for March).
Economic & Health Developments
Even though activity data has been slowing, the economy is not expected to fall off a cliff by any means. Growth expectations for 2022 still places the UK in front of the G7 which means growth differentials are still favourable for the GBP. It seems like the solid economic data (beats for CPI, Jobs, Retail Sales) were enough to convince the BoE to hike, and as long as the data remains firm it should keep the odds of additional tightening on the table. Focus now turns to Omicron to see how it impacts incoming data and affects the rate outlook going into 2022.
Political Developments
Even though a Brexit deal was reached last year, some issues like the Northern Ireland protocol remains, and with neither side willing to budge it seems like these issues are here to stay for now. There has been heated rhetoric from both sides with the UK threatening to trigger Article 16 and the EU threatening to terminate the Brexit deal if they do. For now, these are just threats, but any actual escalation could increase the odds of seeing so risk premium built into Sterling. Furthermore, political uncertainty
surrounding PM Johnson and the lack of trust from his own party opens up another can of worms for Sterling (the currency usually doesn’t perform well when the future of a PM is brought into doubt), and that remains a driver to watch in the sessions ahead.
CFTC Analysis
Latest CFTC data showed a positioning change of +11548 with a net non-commercial position of -39171. It seems like both price action and positioning has caught up with the BoE’s hike in December with Sterling putting in a decent week of gains and positioning also seeing a sizeable reduction in net-shorts.
The Week Ahead
In the week ahead it’s quiet on the data front for the UK once again with GDP the only real data point of concern but we are not expecting much from it. Arguably one of the bigger drivers for the GBP will be what happens to overall risk sentiment as well as the USD. As a currency with a slightly higher beta, the Pound can be sensitive to overall risk sentiment so keeping track of how equities markets are doing will be important. Furthermore, even though we maintain a bullish view on Sterling, the recent run higher has been rather one-sided, and we are inching closer towards some very key technical resistance levels around 1.3600. One possible trigger that could see GBPUSD break through that though is Wednesday’s US CPI. After the push lower on Friday, the DXY broke through key support, and a big miss in CPI which means less need for very aggressive Fed policy is not a good look for the USD.
JPY
FUNDAMENTAL BIAS: BEARISH
1. Monetary Policy
At their Dec meeting the BoJ kept policy mostly unchanged apart from unanimously voting to scale back emergency pandemic relief funding from March which includes tapering corporate bond and commercial paper buying, but they did also vote to extend a portion of the pandemic relief loan scheme to March for smaller firms. As always, the BoJ said they are ready to add additional stimulus and easing steps as the economy needs it. The bank reiterated that even though the economy has picked up it does still remain in a severe situation due to the COVID-19. The bank remains dovish and is unlikely going to change anytime soon.
2. 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 for the JPY; and although monetary policy expectations can still prove marketmoving 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 ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. As the Fed and other banks start to normalize, we do need to remember that it means those fiscal and monetary policy support is being reduced, which could mean a lot more volatility for markets in the weeks and months ahead. Even though that doesn’t mean our med-term bias for the JPY has changed, it simply means that we should expect more risk sentiment ebbs and flows this year, and the heightened volatility can create some fantastic directional moves in the JPY, as long as yields play their part.
3. Low-yielding currency with inverse correlation to US10Y
As a low yielding currency, the JPY usually shares a strong inverse correlation to 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 isn’t perfect and will ebb and flow depending on the type of market environment from both a risk and cycle point of view. With the Fed tilting more aggressive, we think that opens up more room for curve flattening to take place with US02Y likely pushing higher
while US10Y underperform. In this environment we do see some mild upside risks for the JPY, but we should not look at the influence from yields in isolation and also weigh it up alongside underlying risk sentiment and price action in the USD of course.
4. CFTC Analysis
Latest CFTC data showed a positioning change of -9160 with a net non-commercial position of -62262. Even though the JPY’s med-term outlook remains bearish , the big net-shorts for both large speculators and leveraged funds always increases the odds of more punchy safe haven flows and mean reversion when risk sentiment deteriorates. However, despite risk sentiment taking a hit in the past trading week, the JPY has remained pressured as the move in US yields kept any JPY rallies in check.
5. The Week Ahead
In the week ahead the biggest focus for the JPY will be on overall risk sentiment with the big rally in risk sentiment going into the last few trading days of the year with S&P futures managing to squeeze out another all-time high and Nasdaq futures getting very close to doing the same. The big amount of upside has been mostly attributed to equities taking the path of least resistance ( med-term bias remains tilted higher) and moves was probably exacerbated by thinner liquidity and lower volumes. If that momentum can continue at the start of the new year, we can expect to see further downside for the safe haven JPY and will be a key focus for the currency for the week ahead. Apart from that, keeping an eye on US yields will be important as always.