A reversal of yesterday's rush into safe haven currencies has been the predominate theme of the session. News of a 48% rise in Chinese car sales in June and the release this morning of better than expected May trade data from Germany showing a rose in 0.3% m/m rise in exports has helped offset pessimism regarding the global economic outlook. The German trade data comes on the heels of this week's stronger than expected German industrial output and factory orders data. The related better tone in stock markets combined with verbal intervention from a Japanese government official has stimulated buying in 'riskier' currencies and squeezed the yen lower across the board.
Japan's Chief Cabinet Secretary Kawamura was reported as saying that excessive currency movement are undesirable. This was a clear swipe at the sharp moves during yesterday's trading session that forced USD/JPY below the 94.00 level. Having reached a low of 91.86 yesterday, USD/JPY has climbed back higher in London though it has failed to push above 93.60. The bounces in EUR/JPY, AUD/JPY and GBP/JPY have been exaggerated by the shift back into risk. Sterling has won back some ground vs the USD but remains unchanged vs the EUR. The primary focus for the UK market this morning is the BoE policy meeting.
Rates are expected to remain unchanged at 0.5% at today's BoE policy meeting, though there is a risk that the MPC members will vote to increase the size of its asset purchasing plan.
Early this year the Chancellor authorised the purchase of GBP150 bln of assets. In March the BoE decided to buy GBP75 bln and this was extended to a total of GBP125 bln in the June meeting. In June the BoE cited that it would probably take another 2 months for these purchases to be complete suggesting the possibility of a step up in the amount of either in July or August, if economic weakness is deemed to be persisting. In view of soft BoE lending data, the sharp downward revision to Q1 GDP to -2.4% y/y and this week's weak May industrial production data (-0.6% m/m) the focus of BoE policy is likely to remain on stimulus. Cable's better tone this morning reflects the general move back into risk. However, a step up in QE would likely see these gains reverse.
Looking forward, the USD may find some relief in the fact that currencies do not appear to be central to the discussions of the G8. Earnings reports will remain central to whether risk appetite can be stoked further. US Initial claims will be watched this afternoon. Canadian housing starts are also due.
