The British pound has been hammered to fresh lows just above $1.3115. The euro is moving toward GBP0.8500. The
immediate catalyst is three-fold. First, one of the UK's largest property
funds has moved to prevent retail liquidation. Second, the BOE reversed an
earlier decision on the capital buffer for banks, which is tantamount to easing
policy by boosting the banks' lending capability.
Third, UK services PMI was weaker than expected. Nearly 90% of the
responses were given before the
referendum, but the sharp decline in business expectations warns of future
problems, even though the new orders component rose 1.0 to 52.3.
Speculation is mounting that the BOE will ease monetary policy at its next MPC
meeting on July 14.
Sterling is the weakest of the majors, off
0.8%. The yen is the strongest of the
majors, up about 0.8%. Although the yen's gains in such an environment are usually referred to a function of safe haven
demand, we continue to think this is a poor way to characterize the price
action. Who is buying the yen? Yes,
there are some speculators, and this has been picked up by the Commitment of
Traders in the futures market, a proxy for momentum and trend following market
However, these flows are modest compared
with the weekly MOF data. Last week's report showed foreign
investors sold more than JPY2.1 trillion of Japanese bonds, one of the
largest weekly divestments on record, and the second week of sales. They
also sold Japanese equities (~JPY184 bln) for the second consecutive week.
We suspect that Japanese investors and corporations are the biggest
buyers of yen and that this is not so
much a safe haven demand, as reactive
hedging of overseas investments and earning.
The buying of the yen is different than
the buying of US Treasuries or other core bonds. US and Germany benchmark 10-yields
are at new record lows. Peripheral yields
are higher. Part of this may be a function of pricing in weaker
growth and lower inflation, but it appears largely
driven by capital preservation strategies.
services PMI came in at 52.8, besting the flash reading of 52.4. Nevertheless,
it is still down from 53.3 in May. The Q2 average of 53.1 is only a
little lower than the Q1 average of 53.3. This,
coupled with the manufacturing survey results from last week, kept the
composite reading unchanged at 53.1. June was the fifth month that the
composite has been stuck in at 53.0-53.1.
China's Caixin services PMI was reported
at an 11-month high of 52.7, up from 51.2. However, the composite slipped for
the third consecutive month (to 50.3 from 50.5). Separately, the Shanghai
Composite yesterday's gains, tacking on another 0.6%. It now stands at
its highest level since April. Meanwhile, the spread between China and US
10-year yields is near 147 bp today, the widest since last August.
Foreign investors boosted Chinese debt holdings by a little more than 7%,
according to Chinese data, to CNY318 bln (~$45 bln). Note that in the
past month; the yuan has lost about 0.9%
against the US dollar, which offsets nearly 2/3 of the interest pick-up.
The outcome of the Australian election
remains unknown. The Aussie is the second weakest
major currency today after sterling with a little more than a 0.5% fall.
Net-net, it is flat from the eve of the
election. The economic data was not constructive. Retail sales rose
0.2%, not 0.3% as expected, and the trade shortfall was about a third larger
than anticipated (A$2.21 bln deficit vs. A$1.7 bln median guesstimate).
The RBA left policy on hold as widely expected, but the door is clear ajar for additional easing, which the market
has about half discounted over the next three months.
The euro briefly traded throughout $1.1170 target in choppy trading,
but it has been confined to tighter
ranges in quieter turnover in Europe. If the euro remains resilient, the
next target is the $1.1200-$1.1220 area. It may require a break of
$1.1100 to boost confidence that a high is in place. The dollar may see initial
support in the JPY101.40-JPY101.50 area, but the risk is that if the market
remain tumultuous, the dollar is forced to explore the sub-JPY100 levels.
The Australian dollar is reversing after
testing the $0.7550 area. A break of $0.7440 now would confirm a
high and suggest a retest on the $0.7300 area in the coming sessions.
The RBA is seen more likely to ease than the Bank of Canada, but we see
risk that the Canadian dollar comes under new pressure too. A move above
CAD1.2930 could spur the greenback toward CAD1.30, and a foothold above there
points to a bottom in place.