There are three highlights to the foreign exchange market today. First, the yen is marginally softer. The yen's strength this month has been the main development. After making a marginal new high yesterday, some semblance of stability emerged in North America yesterday, and this has carried over into today's activity.
The greenback largely held above JPY107.90 and rose to JPY108.40 in late Asia. It has been consolidating in the European morning. Japan's Finance Minister appeared to ratchet up the rhetoric a notch, warning that if the moves are extreme and one-sided, officials will take action. Yet that there has been no material intervention would imply the Finance Minister's conditions have not been met.
This is important. Many who have stressed the "currency war" narrative have been warning since at least mid-February that BOJ intervention was a growing risk. The fact that there has been no intervention seems to support our contention, which the arms control agreement, not to use the foreign exchange market for competitive advantage, remains intact.
Officials are in Washington DC for the IMF and World Bank meetings. This could be a potential forum to coordinate intervention, but we continue to argue that the bar to intervention is high. There seems to be little reason to expect the US to agree to dollar-buying intervention. Similarly, there is no reason to expect the ECB to agree on euro buying intervention.
The yen's strength coupled with disappointing inflation data may raise the risk of additional easing by the BOJ later this month. The poor reaction to the unexpected easing--adoption of negative rates--at the end of January, may give BOJ officials cause to pause and reevaluate their tools and tactics.
We note that the initial yen rally in the first half of February exhausted itself, and the dollar-yen traded broadly sideways from mid-February through late-March. The recent leg up by the yen at the start of the month may be a combination of seasonal pressures and speculative attention. The seasonal pressure seems to be ebbing and, as we noted, over the last two weeks, speculators in the futures market have added to both long and short positions.
The second highlight in the foreign exchange market today is the extension of sterling's recovery. It began yesterday with a bout of short-covering, but the extension today was sparked by higher than expected inflation. Consumer prices rose 0.4% in March, lifting the year-over-year rate to 0.5%, the highest since the end of 2014. CPI stood at 0.3% in February. Core prices rose to 1.5% from 1.2%, the most since October 2014. The median forecast from the Bloomberg survey was 1.3%.
The details warn that the headline may have been flattered by the early Easter and other base effects. Airfare, for example for 23% in March compared with a 2.2% increase in March 2015. Footwear rose 1% after falling in March last year. Separately food prices fell, and petrol rose less than a year ago. Nevertheless, it does appear that inflation in the UK has bottomed. Service prices rose 2.8% year-over-year while goods prices are off 1.6%. The weakness in sterling may spillover and underpin prices in the goods sector going forward.
That sterling rallied would seem to undermine explanations offered in some quarters that the yen's rise and/or the dollar's decline reflect investors focusing on real rather than nominal rates. The Bank of England meets later this week. Policy remains steady. Brexit risks loom on the horizon, and the economy appears to have lost some momentum.
Sterling has been mostly confined to a $1.40-$1.45 range since early March. We suspect that those who are concerned about Brexit risks are content to be patient and look for better levels to sell sterling. We expect the upper end of this range to hold.
The third development in the foreign exchange market is the continued strength of the dollar-bloc currencies. The firmer commodity prices, including oil prices, and ideas that China's economy is stabilizing are helping to underpin the antipodean currencies and the Canadian dollar. Moreover, some recent domestic data have also been favorable.
Canada reported a strong employment report last week. The Bank of Canada could raise its GDP outlook when it meets later this week, and with the help of a more stimulative fiscal stance, the output gap could close earlier than it had previously projected.
A business survey in Australia, reported earlier today, was better than expected. Later this week, Australia will report the March employment data. Another constructive report is expected. The risk of a rate cut next month may ebb, though the Australian dollar's strength may frustrate policymakers, who fear that the market may be tightening financial conditions prematurely.
After pulling back in early April, the Australian dollar has recovered smartly over the past three sessions. It is testing the $0.7670 area, after peaking near $0.7725 in late March. For its part, the Canadian dollar has taken out its late-March high to rise to its best level since mid-October 2015.
The US session features import prices, where the risk is on the upside after a 0.3% decline in February. Three regional Fed presidents speak (Harker, Williams, and Lacker). The brief flirtation the market had with an April hike has faded. We continue to argue that the clearest signals of the Fed’s intent come from the leadership, Yellen, Fischer, and Dudley. Interest rates differentials are moving slowly back into the US favor, and we expect this to begin giving the dollar better traction.