â€¢ Japanese Yen: Tertiary grows fastest in 4 months
â€¢ Euro: holds ground as equities stabilize
â€¢ Pound: MPC 8-1, labor data shows steady growth
â€¢ USD: all eyes on CPI
Yen Eases on Carry Flows But Good News Lurks Underneath
A relatively uneventful night in FX after earlier bouts of risk aversion pushed USDJPY all the way down to 116.16. but the pair rallied back to the 117.00 figure on the carry trade flows as European bourses steadied and demand for high yielders returned. While the yen continues to be the whipping boy of risk aversion/risk assumption flows, a picture of steadily improving Japanese economic health is beginning to develop in the background.
Tonight brought news that the Tertiary Industry index â€“ a measure of service activity in Japan â€“ rose to 1.3% from 1.0% forecast. This was the fastest pace of growth in 4 months and along with other recent Japanese economic data indicates that demand in perking up in the world second largest national economy. Japanese economy is not yet at the stage where BoJ will consider another 25bp increase to further normalize rates, but it may be getting close. If the next round of wage data reports shows positive growth for a second month in a row then Mr. Fukui and company may feel far more comfortable in tightening monetary policy. This in turn should provide a better fundamental bid for the unit rather than its current status in capital markets as a mere proxy for risk.
Meanwhile in UK the MPC minutes produced no surprises revealing an 8-1 vote to keep rates steady with the main dove David Blanchflower voting for a cut. Furthermore unemployment rolls and wage data demonstrated healthy labor market conditions as rolls declined for twelfth month running while wages increased by 3.7% versus 3.6% expected. The pound, however, saw little follow through from generally positive news as the markets have now come to a consensus that the best that could be expected from the BoE for the new few months is simply neutrality. With very little chance for additional rate hikes in the future, cable has lost much of its carry trade momentum and now simply trades as an alternative to the greenback. Note that the EURGBP cross has maintained its support near 6950 level as rate hike projections for the euro continue to be high, while the consensus market expectation for the pound is an eventual rate cut. Were that to occur, the cross could trade to 7100.