'Yen to gain some support, EURJPY could push below 130 into year end' - Simon Smith, FxPro

SIMON SMITH
PROFILE:
• Current Job: Chief Economist for FxPro
• Career: Holds an MSc. in Economics from the University of London and a BSc. from Brunel University. He has held economic and strategy positions with Standard & Poor’s.

View profile at FXStreet

Simon Smith has over seventeen years experience of macro forecasting and investment strategy research. Prior to joining FxPro in May 2010, Simon was a consultant with Thomson Reuters, having spent four years as Chief Economist at Weavering Capital. 

Simon has held economic and strategy positions with Standard & Poor’s, together with consultancy firms 4Cast and MMS International. He holds an MSc. in Economics from the University of London and a BSc. from Brunel University.

Yes, welcome to the world of FX forecasting. That view was predicated on the Fed not raising rates before year end, then came the employment report. I’ve long held the view that the Fed would not raise this year but it now seems fairly likely that they will move in December. Still, it’s been a factor holding back the dollar for most of the year, so there has been decent mileage in it.

The reaction seen on cable to this week’s CPI numbers was interesting, with the market far more focused on the core rate which rose. People have talked to me about deflation in the UK, mistaking the fact that this refers to a generalised fall in the price level, which is something we are not currently seeing. The case for it being a bear trap (there have been better shorts around) is based on the difference between market expectations for rates vs. what banks are saying via surveys. There is always a mean reverting element to what Banks/economists think (that we revert to the norm) and also an extent in the market. The data has, if anything, been softening of late so I don’t think we’re in a bear trap scenario on the pound.

Advertisement
FxPro offers complete FX services of the FX market, Full Range of Trading Platforms - MT4, MT5, cTrader and professional trading conditions. Not available in US

I think that depends on whether expectations start building for a further rate cut from the RBA. The currency has come a long way and shown a fair degree of resilience of late, especially in light of the ongoing concerns regarding China. As such, I think it’s not the easy short that it once was and any view of further weakness has to be predicated more on what’s going on in the global economy, rather than on a China and/or ‘risk-off’ scenario. As such, I see the Aussie break below the 0.7000 level again as we move towards a likely Fed hike, but I don’t see it falling out of bed as a result.

Banks are quite often sideways on the yen, so many currency forecasters having been burnt one way or the other over the years that they find it safer just to sit on their hands. I see the BoJ sticking to their ground and looking more towards the government for action on the latest weakness of the economy. Furthermore, with the recent decline in the balance of payments surplus turning around, then history suggest that the yen will gain some support as the negative dynamics from that side dissipate. At best I see the yen contained into year end. I think EURJPY is the better way to play it rather than USDJPY, seeing a push below the 130 level into year end.

It’s easy to know what is priced into money markets and bond markets, less so for FX and bordering on getting towards impossible for stocks. Naturally, stocks have benefitted massively from the post-financial crisis policy of the Fed. The underperformance of US stocks earlier this year vs. the rest of Europe was evidence of the more cautious tone. Also, we’ve seen expectations of Fed policy going forward moderate a lot and that’s probably more important for stocks, longer-term discount rates, borrowing costs etc. Let’s face it, money has been cheap for a long-time and also readily available. Firms don’t know what to do with it and are either hoarding, returning to shareholders or buying back shares. Will a quarter point hike in rates make that much difference?