GBP JPY BUY(POUND STERLING - JAPANESE YEN)
GBP - FUNDAMENTAL BIAS: BULLISH
1. Virus Situation
The UK’s vaccination success has been a key driver of positive sentiment for GBP from the start of 2021 and has meant the county is on the verge of completely removing covid restrictions. One short-term negative is recent concerns about the Delta variant which has seen a 4-week delay in the planned reopening originally scheduled for June 21. This doesn’t change the fundamental bullish outlook but is a short-term negative.
2. The Monetary Policy outlook for the BOE
Markets were expecting a very hawkish tilt from the BOE at their June meeting with Gilt yields across the curve pushing higher, and SONIA futures and Sterling pushing higher into the meeting. The bank took a more balanced view by sticking to a transitory inflation outlook and also slightly tempering the more aggressive rate path expectations going into the meeting. The bank is still expected as the next in line to tilt more hawkish, but participants will look towards the August meeting which includes the next MPR for more guidance on that front.
3. The country’s economic developments
Hopes of a faster economic reopening and recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and is something that should continue to be a supportive factor for GBP as long as the data continues to show better-than-expected prints. Something that we should be mindful of here is that a lot of the positives that has driven Sterling higher in 2021 is arguably already reflected in the price, but as long as the data continues to surprise to the upside the trend should be supportive for the GBP as it should provide further support for policy normalization from the BOE.
4. Political Developments
Remember Brexit? Yeah, me neither, but it came back into focus in the form of the recent punchy rhetoric between the UK and EU regarding the Northern Ireland Protocol. The EU reported that they will take a measured response to any further unilateral moves by the UK to delay implementation of the Northern Ireland Protocol. The risk to the current dilemma is that it forces the EU’s hand to retaliate with possible sanctions or tiggering retaliatory measures through the Trade and Cooperation Agreement. Recent reports have suggested that both parties think the odds of reaching a breakthrough is good and has reduced some of the earlier fears about possible escalation in an already strained relationship.
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, especially in the current. 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 synchronized economic recovery and reflation environment. 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 safehaven demand to diminish, resulting in a weak bearish fundamental outlook.
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 as it affects carry trade dynamics. 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. From the start of the year, (as the bias for US10Y started to tilt higher) the inverse correlation has been exceptionally strong over the past couple of weeks and moves in the US10Y continue to dominate JPY price action. As long as the med-term bias for US10Y remains titled higher, that should put additionally downside pressure on the JPY. As US yields have remained pressured following the FOMC, the USDJPY has continued to diverge from the price action in yields, with USDJPY steadily grinding higher while yields have remained pressured. For now, we are keeping a close eye on US10Y as a continued push lower could affect the USDJPY. However, after the FOMC’s recent communication has improved the outlook for the US Dollar we would expect the low yielders like the JPY to remain pressured against the greenback which could see a weaker correlation develop with US10Y.
1. Virus Situation
The UK’s vaccination success has been a key driver of positive sentiment for GBP from the start of 2021 and has meant the county is on the verge of completely removing covid restrictions. One short-term negative is recent concerns about the Delta variant which has seen a 4-week delay in the planned reopening originally scheduled for June 21. This doesn’t change the fundamental bullish outlook but is a short-term negative.
2. The Monetary Policy outlook for the BOE
Markets were expecting a very hawkish tilt from the BOE at their June meeting with Gilt yields across the curve pushing higher, and SONIA futures and Sterling pushing higher into the meeting. The bank took a more balanced view by sticking to a transitory inflation outlook and also slightly tempering the more aggressive rate path expectations going into the meeting. The bank is still expected as the next in line to tilt more hawkish, but participants will look towards the August meeting which includes the next MPR for more guidance on that front.
3. The country’s economic developments
Hopes of a faster economic reopening and recovery has seen both the BOE and IMF upgrade growth projections for the UK economy which has widened the growth differentials between other majors by quite a bit and is something that should continue to be a supportive factor for GBP as long as the data continues to show better-than-expected prints. Something that we should be mindful of here is that a lot of the positives that has driven Sterling higher in 2021 is arguably already reflected in the price, but as long as the data continues to surprise to the upside the trend should be supportive for the GBP as it should provide further support for policy normalization from the BOE.
4. Political Developments
Remember Brexit? Yeah, me neither, but it came back into focus in the form of the recent punchy rhetoric between the UK and EU regarding the Northern Ireland Protocol. The EU reported that they will take a measured response to any further unilateral moves by the UK to delay implementation of the Northern Ireland Protocol. The risk to the current dilemma is that it forces the EU’s hand to retaliate with possible sanctions or tiggering retaliatory measures through the Trade and Cooperation Agreement. Recent reports have suggested that both parties think the odds of reaching a breakthrough is good and has reduced some of the earlier fears about possible escalation in an already strained relationship.
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, especially in the current. 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 synchronized economic recovery and reflation environment. 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 safehaven demand to diminish, resulting in a weak bearish fundamental outlook.
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 as it affects carry trade dynamics. 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. From the start of the year, (as the bias for US10Y started to tilt higher) the inverse correlation has been exceptionally strong over the past couple of weeks and moves in the US10Y continue to dominate JPY price action. As long as the med-term bias for US10Y remains titled higher, that should put additionally downside pressure on the JPY. As US yields have remained pressured following the FOMC, the USDJPY has continued to diverge from the price action in yields, with USDJPY steadily grinding higher while yields have remained pressured. For now, we are keeping a close eye on US10Y as a continued push lower could affect the USDJPY. However, after the FOMC’s recent communication has improved the outlook for the US Dollar we would expect the low yielders like the JPY to remain pressured against the greenback which could see a weaker correlation develop with US10Y.