Japanese Yen update 27 July 2010
Moneycorp, 03 Aug 2010
UK ECONOMY SURPRISES AND DELIGHTS
Gross domestic product grew by 1.1% in the second quarter of 2010. Yen unwanted as commodity prices rise.
Another relatively narrow three and a half yen range took sterling down and up again before opening in London this morning at two yen firmer on the week.
Between Monday and Thursday sterling did little to distinguish itself. Tuesday's public sector net borrowing figure for June was higher than expected at £14.5 billion but not big enough to prejudice the government's target for the year. Wednesday's minutes of the July Monetary Policy Committee (MPC) meeting raised eyebrows but not far enough to take sterling a great deal lower: The committee had discussed the idea of 'a further modest monetary stimulus', in other words another dose of quantitative easing ('printing money', as the tabloids carelessly describe it). There was no vote on the matter but the mere discussion was enough to offset the benefit of Andrew Sentance voting again for a higher Bank Rate. Wednesday's retail sales numbers were better than expected for the month of June at 0.7%, worse than expected for the year at 1.3%.
Sterling's fortunes changed in a most unexpected way on Friday when the Office for National Statistics published its first estimate of how Britain's economy performed in the second quarter of the year. After growing by 0.3% in the first quarter, gross domestic product (GDP) expanded by 1.1% in Q2. It was a far better result than the 0.6% that the analysts had predicted. The figure has to go through two revisions in the next two months and it might end up lower but, for the time being at least, it is a good number and helpful to sterling.
With investors gaining renewed confidence that the global recovery is on track there was little appetite for the safe-haven yen. When the commodity-oriented currencies took advantage of rising commodity prices and rising interest rates the yen had nothing to say in reply.
But there is one development that could help it. Japan's Financial Services Agency has sponsored legislation that will increase the amount of margin that speculative traders have to place against their positions. From next month their leverage will be restricted to 50 times the amount of cash they have committed. In a year's time the multiple will go down to 25x. Individual traders, many of them housewives, will have to either come up with more cash or reduce the size of their positions (some accounts previously allowed leverage of 100x). From a currency point of view it is likely to mean the closing of some of the 'carry' positions which short cheap-to-borrow yen against higher-yielding currencies. Local commentators expect the yen to strengthen and the Australian dollar to weaken as positions are unwound.
That strong GDP figure could give sterling a further boost this week. Buyers of the yen should contain to hedge 50% of their requirement but should be ready to reduce that proportion if sterling is able to make an upward break.