Yen surges on US warnings against Japanese intervention

Good morning,

‐ Gold Prices on Pace for Longest Loss Streak in 6 Months.

‐ British Pound May Rise as BOE Officials Defend Brexit Outlook.

‐ Best/worst performers in majors vs USD today: GBP: 0.0%, CAD: ‐0.1%, EUR: ‐ 0.1%, CHF: ‐0.2%, AUD: ‐0.4%, NZD: ‐0.6%.

‐ AUD plunging alongside front‐end bond yields after RBA's Stevens defends existing inflation target, says price growth is too low. We see exchange rate as a shock absorber, $AUD doing what you'd expect it to do at the moment. Inflation target not rigid thing. Inflation target doesn't demand kneejerk responses.

‐ Japan's Finance Minister Taro Aso: FX move of 5 Yen over 2 days considered oneway, lopsided. No intention of further lowering FX.

‐ Fed's Harker: A major risk is China, it has been for quite a while. Market expectation for Fed action moved in right direction. : Doesn't anticipate inflation 'spiking up', aware of Brexit but it ought not drive policy decision. Want to avoid disruption when we shrink balance sheet, not sure what size balance sheet will be appropriate….'Can easily see' two, three rate hikes in 2016.Latest CPI report confirms view inflation to rise…

‐ During the gathering of central bankers and finance ministers at the G7 meetings in Japan on Saturday, the US reiterated warnings to its host against intervening to weaken the yen. In the weeks prior to the meetings, Japanese officials had been issuing an intensifying stream of intervention rhetoric attempting to justify Japan’s readiness and willingness to take action in the event of exceptional yen volatility (or perhaps more accurately, yen strengthening). Partly as a result of these public comments and the resulting potential risk of an actual intervention, the yen had been weakening since early May, pushing up the USD/JPY currency pair from its recent long‐term lows……From a technical perspective, USD/JPY has continued to trade in a well‐defined downtrend characterized by lower highs and lower lows since late last year. Since early May, however, the currency pair has risen from its new long‐term low of 105.54, as a rebound for the dollar has been augmented by a weakening yen due to the noted verbal intervention by Japanese officials. USD/JPY went on to hit a high of 110.58 late last week, just short of key 111.00 resistance, before Monday’s G7‐driven retreat back down towards 109.00. In the process of this retreat, price has tentatively dropped back below its 50‐day moving average. With continued trading under the 110.00 psychological level, the G7 intervention warnings from the US could be seen by the markets as being at least tentatively effective, and the yen’s recent propensity to strengthen could likely resume. In this event, the next major downside target for USD/JPY remains at the key 108.00 support level, followed further to the downside by the major support objective at 105.00….

‐ China weakens the Yuan reference rate 0.02% to 6.5468 against the $USD from 6.5455 on Monday.

‐ Whether $GBPUSD drops to new lows immediately or rallies first...the risk to reward is to the downside.

‐ Doesn't anticipate inflation 'spiking up', aware of Brexit but it ought not drive policy decision.

‐ Deutsche Bank: Buy USD/CAD, Sell CAD/NOK…The CAD is more vulnerable than the NOK to a stronger USD environment, whether it be triggered by Fed tightening; or, global risk‐off events like changes in China’s FX policy. The CAD’s (relative) Achilles heel compared with the NOK, is its large narrow basic balance deficit running at near cycle record levels of 4.5% of GDP. This compares with a Norwegian equivalent narrow basic balance surplus of 2% of GDP….Canada is particularly vulnerable to monetary policy divergences with the Fed because i) its C/A deficit is predominantly financed by debt related flows; and ii) these bonds are regarded as relatively close substitutes with USD fixed income instruments.

In what is still likely to be a gradual but prolonged Fed tightening cycle, the market’s probability of a single Bank of Canada rate hike in three years time is less than 50%! This policy divergence will prove remarkably persistent and pronounced, going over and beyond anything seen since the late 1990s when the CAD was extremely weak.

USD/CAD and CAD/NOK are seen targeting 1.35 and 6.05 respectively.

‐ Major news for today: German ZEW, GBP Inflation, NZD Trade Balance, Euro group meetings.