The run on the yen continues. The US dollar and euro are at new multi-year highs against the yen. The BOJ confirmed its JPY80 trillion monetary base target unexpectedly adopted at the end of last month. Last month’s seemingly last minute decision was based on a very un-Japanese 5-4 vote. Today, three of the dissents accepted the fait accompli; one did not (Kiuch).
Oil prices have declined for the better part of the past five months. The unexpected contraction in the Japanese economy in Q3 underscores that the strong supply growth is taking place amid weakening demand. OPEC’s meeting is still ten days away. Remember that OPEC oil is mostly the heavy sour variety, while the US shale product is mostly light sweet. This means that even if OPEC can agree and implement a cut in output, it may not have as much impact on the US benchmark WTI as it may appear.
It is beyond dispute. The US dollar is in a powerful bull run. There are two main drivers, and their ability to dominate the price action varies according to the news stream. The first is constructive economic news from the US that reinforces ideas that the Fed will likely raise rates next year.
Suppose you’re in the supermarket shopping for groceries. While you’re strolling the aisle with your cart, a shadowy figure looms over your shoulder and changes the prices on the items you want to buy before you get a chance to pick them up.
As you reach for some vine tomatoes, you notice the price just jumped 20 cents. When you select some brie from among the cheeses, you witness the number on the sticker change right before your eyes. Ditto when you look for your favorite brand of granola.
While the US dollar has come back bid today, the real story is the drop in the Japanese yen. The yen is off almost 1% against the US dollar and nearly as much against the euro. The greenback poked through the JPY116 level, after having dipped barely and briefly through JPY114 yesterday. For its part, the euro has bounced from JPY142 yesterday to nearly JPY144 today.
The underlying driver of the foreign exchange market is the divergence between the US and the other high-income countries. This was underscored in the past couple of weeks. Between the BOJ and the government’s pension fund, monetary stimulus and capital outflows are set to accelerate from the world’s third largest economy.
The US dollar is narrowly mixed as the market awaits for North American jobs data to close out the week. It has been another good week for the greenback. It has appreciated against all the major and emerging market currencies.
The offshore renminbi bond market has boomed since the Chinese authorities first allowed domestic banks to issue them in Hong Kong in June 2007. But appetite for the paper — popularly known as ‘dim sum bonds’ — is starting to wane as access to onshore markets becomes easier. To stay relevant, the dim sum market must develop further.
In March of this year, forex volatility was about as lifeless across GBP, DXY, EUR and JPY as it had been for the past five years: pretty much matching a low in October 2012. In April, volatility across those currencies was as low as it had been since before the 2008 crash, matching the record set in May 2007. July, August, May and June of this year were the four least volatile months for forex since 1994 (see chart, all data from IG’s forex pages). Before this summer, average volatility across those four currencies had only dropped below 4% once in 20 years.
The US dollar had a good week to close out October. It was bolstered to new highs against the euro and yen. It is driven by both positive developments in the US and negative developments in Europe and Japan.
