Note

GBP/JPY analysis

· Views 1,957

 
GBP/JPY analysis
 
GBP

FUNDAMENTAL BIAS: BULLISH

1. Virus Situation

The successful vaccination program has allowed the UK to open up faster and sooner than peers & provides a favourable environment for GBP.

2. The Monetary Policy outlook for the BOE

The BoE meeting on 5 August provided a flurry of comments with something for the doves and the hawks. The QE vote split was a tad more dovish with a 7-1 split with BoE’s Saunders to only dissenter, while the upgrades to growth and inflation were positive but with similar comments of ‘transitory’ price pressures muting any real market impact . The reasons for the bank to remain patient right now in terms of policy normalization is the current uncertainty surrounding the virus and of course the bank waiting for the end of the furlough scheme to assess the impact on the labour market. That means, that the bank would arguably be in wait-and-see mode until at least October or November. The other change that was important to take note of was the reduction in the bank’s QT threshold from 1.5% to 0.5%, with the bank looking at a bank rate of 0.5% to stop reinvesting maturing assets and a rate of 1.0% to start selling assets and reducing the balance sheet . Market participants are mixed about what this means for the bank as on the one end it’s positive since the bank has enough confidence to lower the balance sheet even while rates are low, but on the other end it also means that rates can stay lower for much longer which is more negative. Arguably the most important comments to take away was their continued optimism about the economy despite the uncertainty as well as their comments that modest tightening will be required.

3. The country’s economic developments

Hopes of a fast economic recovery has seen the BOE and IMF upgrade GDP projections for the UK which has widened the growth differentials between other major economies by quite a bit. As the economy continues to rebound this should continue to be supportive for GBP as long as the data reflects that. Something to be mindful of is that a lot of these positives are arguably reflected in the price. Thus, if we start to see some disappointing data, that could mean that decent upside would be more difficult for Sterling.

4. Political Developments

Remember Brexit? Yeah, me neither, but this week the rhetoric between the two sides continued to go in the wrong direction with the UK side explaining to the EU that they are looking at all the options on the table (include article 16) if they can’t reach an agreement with the EU regarding the Northern Ireland Protocol. For now, Sterling has looked through all the rigmarole and should continue to do so as long as the cans are kicked down the road.

5. CFTC Analysis

GBP positioning moved back into neutral positioning with a +5598 build according to the most recent CFTC data. Current levels for Sterling still look attractive for med-term buyers, especially with the positioning seeing quite a flush in the past few weeks. With the only data point of note for Sterling in the week ahead being GDP data, we are mostly likely going to see majority of influence coming from movement in the USD and overall risk sentiment.


JPY

FUNDAMENTAL BIAS: BEARISH

1. Safe-haven status and overall risk outlook

As a safe-haven currency, the market's risk outlook is the primary driver of JPY. Economic data rarely proves market moving; and although monetary policy expectations can prove highly market-moving in the short-term, safe-haven flows are typically the more dominant factor. The market's overall risk tone has improved considerably following the pandemic with good news about successful vaccinations, and ongoing monetary and fiscal policy support paved the way for markets to expect a robust global economic recovery. Of course, there remains many uncertainties and many countries are continuing to fight virus waves, but as a whole the outlook has kept on improving over the past couple of months, which would expect safe-haven demand to diminish and result in a bearish outlook for the JPY.

2. Low-yielding currency with inverse correlation to US10Y

As a low yielding currency, the JPY usually shares an inverse correlation to strong moves in yield differentials, more specifically in strong moves in US10Y . However, like most correlations, the strength of the inverse correlation between the JPY and US10Y is not perfect and will ebb and flow dependent on the type of market environment from a risk and cycle point of view. In the past week we saw a perfect environment for downside in the JPY versus the USD when better-than-expected ISM Services data and less dovish comments from Fed’s Clarida gave US10Y a lift alongside the US Dollar , which was enough for the USDJPY to break back above 109.00 and 109.50. Then on Friday the good US jobs report saw yet another environment for US10Y and the Dollar to push higher, creating yet another perfect environment for USDJPY to push higher, and the pair managed to reclaim the 110.00 and break above key technical trend support. Given the positive backdrop from last week, the pair should continue to enjoy upside, with the biggest risk being any major risk off moves which might see downside in yields and upside in the JPY from safe haven flows.

3. CFTC Analysis

The JPY remains the biggest net short among the majors and didn’t manage to take any real advantage of the drop lower in US10Y . Given the wash out in treasury positions and the move towards 1.12% in US10Y over the past few weeks the JPY has not really taken the bait to appreciate as one would have thought. Thus, even though the currency remains oversold from a positioning point of view, it does show that there is some possible asymmetry in long USDJPY right now as a move lower in yields have not negatively affected the pair as one would have expected.
After the most recent Fed rhetoric and the solid US data we’ve have finally seen some promising moves higher in US10Y in line with the med- term outlook, and with a very light data calendar in the week ahead a further move higher in the USD and US10Y could provide a good backdrop for a further grind higher in the USDJPY , with big risk off flows the biggest risk to that view as it should be supportive of the safe haven JPY.

Disclaimer: The content above represents only the views of the author or guest. It does not represent any views or positions of FOLLOWME and does not mean that FOLLOWME agrees with its statement or description, nor does it constitute any investment advice. For all actions taken by visitors based on information provided by the FOLLOWME community, the community does not assume any form of liability unless otherwise expressly promised in writing.

FOLLOWME Trading Community Website: https://www.followme.com

If you like, reward to support.
avatar

Hot

Very clear hope you get reward
@隨浪者 Haha…. Good💪🏻

-THE END-