Yen Set to Continue Surging on Forex Market Correction

19.10.14

Yen Set to Continue Surging on Forex Market Correction

Forex price action has mostly been dominated by risk-off moves in the past few trading days, as weakening inflationary pressures and concerns on the Ebola outbreak have dominated newswires.

In the UK, annual inflation fell to record lows, as the headline CPI for September fell from 1.5% to 1.2% while the core CPI dropped from 1.9% to 1.6% – farther from the central bank’s 2% inflation target. This was enough to convince traders that the BOE might not be able to hike interest rates early next year, for fear of dragging price levels much lower.

In China, the headline CPI dropped from 2.0% to 1.6%, dragged down mostly by falling commodity prices. This has been spurred by overcapacity and the downturn in global demand, posing risks to production and employment in the world’s second largest economy. This comes after the IMF recently decided to downgrade global growth forecasts, citing the increased likelihood of a euro zone recession and a slowdown in economic output from Japan.

Weaker than expected consumer spending data in the US also contributed to the run in risk aversion, as both headline and core retail sales figures missed expectations. The headline figure marked a 0.3% decline while the core version of the report showed a 0.2% drop, indicating that the economy hasn’t fully recovered yet. This provided support to the Fed’s more cautious stance, also reminding market participants that the US central bank might not be able to tighten monetary policy soon.

Meanwhile, the dairy auction in New Zealand showed green shoots, as prices picked up by 1.4% and put an end to the recent streak of losses. Commodity currencies barely drew support from this release though, as further signs of weakness are anticipated. The Bank of New Zealand even decided to downgrade Fonterra milk payout forecasts to farmers and suppliers.

Global equities were mostly weaker in the past few days, as shares of companies in the airline and tourism industries were hurt by the worsening Ebola outbreak. Several world leaders have already expressed concern about the potential repercussions of this epidemic on the global economy.

In Japan, the BOJ was unable to meet its bond-buying target of 3 trillion JPY this week. This indicates that the central bank is facing a tough challenge in boosting liquidity, suggesting that other policy moves might need to be explored in order to keep growth afloat.

Euro zone economic data has been weak as usual, with the German ZEW index dropping to negative territory and the region’s ZEW economic sentiment figure tumbling from 14.2 to 4.1. This suggests dimmer prospects for the region, as many analysts predict that a recession is bound to take place within the next six months

All in all, the US dollar was generally weaker despite the pickup in risk-off flows, with the currency giving up gains to the yen and the Swiss franc. Perhaps the latest shift in the Fed’s monetary policy bias is still hurting the safe-haven currency but it remains to be seen whether the safe-haven flows could allow the Greenback to resume its climb or not.

The Japanese yen was significantly stronger, erasing most of the losses it chalked up in the past quarter. After all, the BOJ has adamantly refused to admit that the economy needs further easing, with a potential pickup in Q3 performance likely to seal the deal and convince traders that Japan is in recovery mode. European currencies are slightly weaker, as the pound is grappling with the BOE’s less upbeat tone and reconciling it with the latest round of weak data. Commodity currencies have mostly been moving sideways.