Yen jumps after Kan victory in Japan

A couple of days of risk-on is never a bad thing. The way Tuesday is shaping up it is too early to determine whether today will mark the end of the bullish run. However, strength in the Japanese yen and Swiss franc are bothering investors somewhat. Is this the turning point or is there more to the desire to buy those safe havens?

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Japanese yen – The yen reached a 15-year high yet again today following news that there will be no change at the top of the DPJ. Prime Minister Kan is staying put, but his victory over Mr. Ozawa was far from a whitewash and has left sufficient hallmark of dissatisfaction with the leadership that ministerial changes are a highly likely aftermath. The yen rose to ¥83.07 per dollar and to ¥106.77 per euro. While on the one hand Mr. Kan’s victory reduces the likelihood of the style of intervention promised by his opponent, the very fact that the yen is rampaging possibly means the day is drawing near when the Bank of Japan might act. Indeed, today Finance Minister Noda refused to rule intervention out as part of bold measures aimed at rescuing the economy.

Aussie dollar – The Aussie is trying hard to recapture 93.50 U.S. cents after declining overnight on account of yen strength and a patch of risk aversion. The August reading of business confidence from NAB delivered a rise from four to 11, while business conditions for the period remained static at an index reading of five. The PBOC allowed the yuan to continue its mercurial rise as it fixed at an even stronger level against the U.S. dollar overnight. Onlookers believe this may be an advance concessionary move ahead of forthcoming Sino-American trade discussions.

Canadian dollar – The Canadian dollar remains towards its highest value against the dollar in three weeks. A pipeline closure heading to the U.S. has helped maintain stronger crude oil prices while the risk-on environment has invigorated demand for the unit. It’s currently trading at an unchanged 97.16 U.S. cents.

Euro – The single currency rose to its best in eight sessions triggering stop activity above $1.2900 for a couple of hours. However, a downbeat assessment by German investors about the future has unsaddled the euro this morning sending it scurrying to as low as $1.2830. The German ZEW survey of investor and analysts’ expectations slumped to -4.3 in September following a reading of 10 last month. That was the weakest reading in 19 months. This measure is used to forecast the economic temperature six months forward and the bearish nature of today’s result is somewhat baffling. It is worth noting that markets were significantly lower than they are now during the final week of August, when there was plenty of bad news doing the rounds. To confound the issue further, the ZEW current situation improved well beyond today’s forecast to 59.9 from 44.3 in August. The raw interpretation is quite extreme with investors responding that they feel much better about the present yet distinctly pessimistic about the future. The divergence seems distinctly odd.

British pound – The pound slumped to $1.5350 earlier today after a RICS report showed a far larger number of home surveyors reporting recent price declines than increases. The previous balance of -8 worsened to -32 when forecasters had predicted a modest decline to -12. It would seem that the global deleveraging process continues with home price declines only temporarily arrested. With the outlook for stubbornly high unemployment virtually guaranteed, it’s hard to see how an extension of the central bank’s asset purchase program would turn the situation around. Leaning on yields does not say anything about home values. It simply means that mortgagees could refinance and feel the glow of rising disposable income. But artificially depressing mortgage rates doesn’t guarantee a return to rising prices. The pound outflanked the euro by rising to 83.43 pence, while it fell to ¥128.50 against the yen. Investors were also disappointed by wayward consumer price data that strayed above the central bank’s official 3% ceiling for a sixth-month. And while a rebound in a Nationwide Building Society index of consumer confidence instilled confidence, taken together both measures reduced the likelihood of a continuation of the Bank of England’s asset purchase program and helped keep the pound weak.

U.S. Dollar – The dollar index had a decent range overnight but is now unchanged at 81.87. U.S. retail sales for August rose ahead of expectations by 0.4% and felt the weight of a dip in auto sales. Back-to-school sales helped drive consumptions. Without auto and parts sales, retailers sold 0.6% more than in July where sales were revised a notch lower in today’s revision.

Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC

Note: The material presented in this commentary is provided for informational purposes only and is based upon information that is considered to be reliable. However, neither Interactive Brokers LLC nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Neither IB nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.
About the Author
Andrew Wilkinson

Andrew is a seasoned trader and commentator of global financial markets. He worked for several London-based banks trading cash and derivatives before moving to the U.S. to attend graduate school. Andrew re-joins Interactive Brokers following a two-year stretch at a major Wall Street broker-dealer as their Chief Economic Strategist. His coverage of stocks, options, futures, forex and bonds regularly surfaces in global media, and over the last several years Andrew has made many TV appearances on Bloomberg, BBC, CNBC and BNN and Yahoo Finance.

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