There hasn’t been much news over the past 24 hours and this is reflected in modest currency movements. The strength of the Yen remains a key focus for the market.
Market sentiment has improved from the risk-off mood early in the week. Most equity markets are stronger, with Japan a notable exception. Better sentiment might reflect the circa 5% gain for oil prices on better news for the sector. The EIA reported a fall in crude inventories of 4.9m barrels last week, while Kuwait attempted to keep alive hopes for a production freeze deal, saying a deal could be reached without Iran.
The USD is on the soft side overall, even with a little boost following the March FOMC minutes. Reading the headlines, the minutes highlight a range of views, with some favouring a tightening in April and several against such a move. All in all, the committee seems divided but we know that Yellen is firmly in charge and she remains on the more dovish side, with her comments about “proceeding cautiously” resonating. One can probably expect further dissents over coming meetings.
USD/JPY touched a fresh low of 109.34 this morning. It has become clearer that risk appetite is not a key influence at the moment, with the Yen strengthening, against the improved risk appetite overnight. The market has lost confidence in the BoJ to do anything that would weaken the Yen so it seems to be gravitating towards its longer term anchor. Incidentally, our long-term fair value estimate for USD/JPY based on PPP is 93, highlighting that the Yen remains very cheap in a longer term context.
The AUD has recovered some of the lost ground earlier this week, with AUD/USD edging back up towards the 0.76 handle. The NZD is also slightly stronger, more a reflection of the generalised USD weakness. It has spent much of the last 24 hours in a tight range and has settled at 0.6825.
Of the majors, GBP is at its familiar spot at the bottom of the leaderboard. EUR/GBP temporarily breached the 0.81 mark and GBP/USD almost fell through 1.40, but has since recovered to 1.4125.
Finally, China’s depreciating currency isn’t going unnoticed. The weaker USD is allowing a stronger CNY fix each day but at the same time on the PBoC’s currency basket the currency is actually depreciating. This conflicts with the official line that the PBoC would keep the currency stable on a basket basis. Since the beginning of the year a replica index of China’s currency basket has depreciated by just over 3%, even though the currency is fairly flat against the USD point-to-point.
A weaker Chinese currency represents a risk to other emerging markets and also represents a downward force, albeit mild at this stage, on the Australasian currencies.
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