BNY Mellon: The Aerial View: Summer Holidays

BNY Mellon: The Aerial View: Summer Holidays

By Simon Derrick, Chief Currency Strategist, BNY Mellon

The rapid move towards a more benign, risk-friendly environment has picked up significant momentum since the middle of this week.

Both the CSI 300 and the TOPIX have recovered their losses while other key flash points (from USD/CNH, the performance of the PLN and HUF) have seen relative calm return. Even the TRY has managed to stabilise itself over the past 24 hours despite comments from President Erdogan that interest rates in Turkey are going down not up.

The clearest expression of this sentiment shift has been the positive performance of the USD against its mainstream peers as yields have started to tick higher again. The most telling move (given its reliability as a barometer of sentiment) has been against the JPY with the breaking of a broad downward trend that dates back as far as the summer of 2015.

This matters given the propensity of USD/JPY to stage sudden rapid and substantial moves. Possibly the best example of this remains the USD rally seen between November 2012 through until the end of 2014.

JPY strength had proved a persistent issue in the years running up to the election of Shinzo Abe as prime minister with a number of less than totally successful intervention campaigns emerging.

This changed in November 2012 as it became clear that Mr Abe would bring significant pressure to bear upon the BOJ to introduce ultra-accommodative monetary policy measures should he be elected. With him making good on this promise following the election (as one of the three arrows of Abenomics) the USD moved from below JPY 80 to above JPY 102 in less than six months.

While the next 15 months did see the odd sharp move, the dominant story was one of consolidation. However, the second half of 2014 saw a second wave of dramatic JPY weakness kick in.

Possibly the most memorable episode during this period occurred in late October when the BOJ policy board voted 5-4 to increase the pace at which it expanded base money, to increase its annual purchases of JGBs by about JPY 30 trillion and to extend the average duration of its holdings to around 10 years.

The reason for the drama is that this came on exactly the same day that the government panel overseeing the Government Pension Investment Fund approved plans for the fund to lower its holdings of JGBs to 35% from 60%, raise its holdings of domestic stocks to 25% (from 12%) as well as increase its holdings of foreign stocks to 25% and foreign bond allocation to 15%.

The combination of these two factors helped lift the USD from below JPY 110 to above JPY 120 in a matter of weeks (a move echoed two years later in the aftermath of the US election).

Given this propensity for rapid moves, a thin summer market ahead and notably robust sentiment, the risk right now must be for a similar move to develop in the weeks ahead.

• Market finding it increasingly easy to shrug off potentially bad news

• Most notable measure of shifting sentiment has been moves in USD/JPY

• There is a history of sharp upward moves for the USD against the JPY


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