Overnight saw considerable JPY volatility as Bank of Japan governor Kuroda was out saying that the BoJ’s easing was not linked to the GPIF (pensions) announcement of diversification away from domestic bonds. In addition, Japan’s Prime Minister Abe commented more explicitly than previously on the prospects for dissolving Japan’s lower house and calling for a national election by mid-late December.
The idea might be for Abe to cement a larger majority for a larger reform push and expanded fiscal efforts, together with a possible delay/cancellation of the planned sales tax rise next year. This would all be USDJPY positive, with the downside risk (besides from the JPY’s usual negative correlation with risk appetite) if the Bank of Japan objects to the fiscal implications of cancelling the tax or if the move to dissolve the lower house doesn’t proceed.
The whippy action in USDJPY shows that the market has gotten very nervous on this issue now, and the action could remain treacherous on further ad hoc developments. The inability of the new highs above 115.50 to hold yesterday makes me a tad cautious on JPY crosses now.
The Reserve Bank of New Zealand’s Wheeler was out discussing policy with a parliamentary committee and said that the current Official Cash Rate of 3.50% is “still low by historic standards.” And “We still believe rates are providing stimulus to the economy.”. Disingenuously for a central banker that wants a weaker currency, Wheeler also said that a neutral OCR would be 4.5%, though he did add that he felt the currency is overvalued and unsustainably strong. NZD rallied on this, with AUDNZD back below 1.1100 and NZDUSD above 0.7800.
Looking ahead
The key focus today is on the UK and its latest batch of earnings and labour market data – with the most potent surprise potential from any strong upside or downside surprise in the September earnings data, as wage inflation appears to be the key parameter the Bank of England is watching for timing their eventual move to remove accommodation.
The market reaction may be a bit muted or tentative, because an hour after the data releases we have the critical quarterly BoE inflation report – watch for any revision to inflation forecasts and comments on wage pressure as critical for the near term direction on GBP. It feels like the market has gotten very neutral on GBP and is looking for fresh inputs and could therefore be highly reactive to strong surprises in the data and/or new guidance from this report.
Also note that overnight, the UK will release the RICS House Price Balance survey, which is the best survey on the trajectory of UK house prices, and has been coming in consistently lower in recent months, as one might expect as housing market activity has cooled noticeably.
Chart: GBPUSD
Each of the recent lows in GBPUSD has been steeply retraced before the pair churns back lower again, and today’s UK releases could confirm or reject that pattern, with significant two-way risks for GBP on earnings data and the BoE guidance. The key upside resistance looks like 1.6000/50 while the downside objective may come in at 1.5725 or so, close to the 61.8% Fibo of the huge rally from 2013 lows to this highs above 1.7200 over the summer. EURGBP may be a more “pure” way to trade the outcome of today’s UK developments. 
Please be aware that the European Central Bank's Mario Draghi will be out speaking late today in Rome.
Technically, the USD is looking vulnerable to a squeeze again as it has dribbled back toward, and even beyond some of the support levels from Monday (The NZDUSD sell-off has been neutralised and AUDUSD is back through the first key resistance that held on Monday (0.8680), while EURUSD trades nervously just below the key 1.2500/25 resistance zone. Where the USD settles today may tell us whether we’re stuck in neutral again on the USD rally or whether the greenback can throw off this latest threat and continue to rally.
Economic Data Highlights
- Australia Nov. Westpac Consumer Confidence rose to 96.6 vs. 94.8 in Oct.
- Australia Q3 Wage Price Index out at +0.6% QoQ and +2.6% YoY as expected and vs. +2.6% YoY in Q2
Upcoming Economic Calendar Highlights (all times GMT)
- Norway Norges Bank’s Nicolaisen to Speak (0910)
- UK Oct. Jobless Claims Change (0930)
- UK Sep. Average Weekly Earnings (0930)
- UK Sep. ILO Unemployment Rate (0930)
- Euro Zone Sep. Industrial Production (1000)
- UK Bank of England Inflation Report (1030)
- Hungary Central Bank Meeting Minutes (1300)
- Canada Oct. Teranet/National Bank Home Price Index (1330)
- Euro Zone ECB President Draghi to Speak (1400)
- US Fed’s Kocherlakota to Speak (1830)
- Japan Oct. PPI (2350)
- Japan Sep. Machine Orders (2350)
- New Zealand Nov. ANZ Consumer Confidence (0000)
- Australia Nov. Consumer Inflation Expectations (000)
- UK Oct. RICS House Price Balance (0001)
- Australia RBA’s Kent to Speak (0130)
- China Oct. Retail Sales (0530)
- China Oct. Industrial Production (0530)
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