Latin America is going to end 2015 with a big bang. The entire region has experienced what could only be described as a mini Latin Spring. The corrupt government of Argentina lost power to the pro-business leader, Mauricio Macri. Meanwhile, Venezuela's left-wing extremists suffered a defeat in Parliamentary elections. More recently, Brazil's president, Dilma Rousseff, is facing impeachment charges amid a corruption scandal.
From the Bank of Japan’s recent monetary statements, one might assume that Yen bears have hit a brick wall. The BoJ refrained from adding more stimulus and kept its ¥80 trillion annual bond purchases unchanged.
The BoJ’s reticence seems a disquieting throwback to the monetary policy of the Shirakawa days. Then, the BoJ was in a clear state of denial and refrained from making extra stimulus. Now, though it may seem history is repeating itself, this is not the case. Governor Kuroda is certainly no Shirakawa, and the Yen is not about to get stronger.
What Is The BoJ Really Doing?
At first blush, it just doesn’t add up. How can this be the same Haruhiko Kuroda? The man who announced ¥80 trillion in stimulus in a jaw dropping move suddenly and inexplicably turned passive. But, as the saying goes, appearances can be deceiving. In fact, the BoJ is really making a very calculated move. Continue reading "USDJPY: Bullish On The Dips"→
Two weeks ago investors in the Aussie Dollar were on the receiving end of a sweet surprise. The official unemployment rate dropped to 5.9%, smashing analysts’ expectations. That suggested the Reserve Bank of Australia’s latest easing cycle, which began about a year ago, might soon be ending.
But before you jump on the Aussie bandwagon, you need the right strategy.
Aussie Outlook Looking Brighter
The truth is that the whiff of optimism had been long overdue for the Aussie Dollar. Even before the unemployment data there had been tentative signs of stabilization in the Australian economy.
Investors in the Turkish Lira got a whiff of optimism recently following the AKP party’s landslide victory. What’s the reason for the optimism you might ask? It’s that Turkish President Recep Tayyip Erdoğan would now have a stronger hold at the helm. That means the AKP party could conceivably push through much-needed reforms. But the fact is that’s really just wishful thinking. Any strength in the Turkish Lira should be used for selling not buying.
TRY Looking Bearish
Usually, I like to leave the FX charts for dessert, yet sometimes a quick glimpse can better deliver my point. Looking at the chart it becomes clear that the path towards a higher USD/TRY hasn’t budged a bit. Any inkling of optimism was overwhelmed by pessimists looking to get out of the Turkish Lira. So much so in fact that most of the Lira’s gains have already been lost.
This week is expected to be a choppy one for the Pound Sterling. On Thursday, the Bank of England is set to publish its quarterly Inflation Report alongside the BoE rate decision. FX investors want to see if, afterward, a more hawkish picture emerges. If that’s the case, Sterling could quickly move higher against its battered peer, the Euro.
What to Watch for in the Inflation Report
Essentially, there are three different points worth watching in next week’s Inflation Report.
• The first are global risks. In August’s Inflation Report, the BoE warned of downside risks to inflation from global weakness. Yet after the Fed dropped its own warning on global risks, the BoE may follow suit. That will, of course, be the first hawkish sign.
• The second would be the risk of imported inflation or, in this case, disinflation. The BoE has justifiably warned of the consequences of a weak Euro. Many UK imports come from the Eurozone, and the Eurozone is a key export destination. Thus, a weak Euro weighs on UK inflation by lowering prices of goods within the UK. If the Bank sees this risk as more muted, that’s a positive sign. Although with chances of additional ECB stimulus increasing it’s hard to see a change to this segment.
• The third would be inflation expectations. Of course, it all does eventually narrow down to inflation expectations. In its past report, the BoE had expected downward inflationary pressures would gradually recede in the second half of the year. Is this scenario still intact? If, over the past quarter the BoE still sees the risk of deflation diminishing, that’s another hawkish arrow. It’s also another sign that the BoE, although at a somewhat slow pace, is moving toward high rates.
Reasons to be Upbeat
Generally, markets are optimistic on the chances of UK inflation stabilizing and the BoE turning more hawkish. The reason is the dissonance between wage gains and inflation. The chart shows that core inflation (which neutralizes seasonal and external factors) has lagged wage growth. Meanwhile, UK retail sales growth has remained robust, growing at 6.5%. This suggests that Britons are earning more and spending more. That, eventually, has to translate into higher inflation. Continue reading "The Next FX Play: Long Sterling"→