Yen Rally Extends, Eurozone Sentix Confidence Hits Decade High

Yen jumps sharply this week and is extending it’s broad based rally today. There are a couple reasons noted in the markets for the move. The sudden escalation in tension in Middle East, between Qatar and other nations, is seen a a factor. The uncertainties over election in UK is another one. However, we’d believe Yen’s strength is more concerned with the outcome of former FBI director James Comey and the impact on US President Donald Trump. And investors are getting increasingly impatient on the lack of progress in Trump’s tax reform and economic policies. This is clearly seen in the sharp fall in US bond yields and persistent weakness in Dollar.

Eurozone Sentix hits near decade high

Euro remains firm against the greenback in spite of mild retreat. Eurozone Sentix investor confidence rose to 28.4 in June, up from 27.4 and beat expectation of 27.4. That’s the highest level in nearly a decade, since July 2007. The current situation index rose to 36.0, up from 34.5. Sentix noted that "the assessment of the current situation climbs to the highest level since January 2008, underlining that it is not just ephemeral expectations, but increasingly hard data, that are driving the upswing in the Eurozone.". Also from Eurozone, retail sales rose 0.1% mom in April, in line with consensus.

Sterling lacks momentum ahead of election

Sterling is mildly firmer against Dollar and Euro this week but lacks decisive momentum. Ahead of UK election on Thursday, renowned physicist Stephen Hawking declared his support for the Labour. He warned that "another five years of Conservative government would be a disaster for the NHS, the police and other public services." Nonetheless, Hawking also criticized Labour leader Jeremy Corbyn as a "disaster" and noted last week that "his heart is in the right place and many of his policies are sound, but he has allowed himself to be portrayed as a left wing extremist."

RBA stands pat as widely expected

As widely anticipated, RBA left the cash rate unchanged at 1.5% today. Policymakers indicated that, "transition to lower levels of mining investment following the mining investment boom is almost complete". Meanwhile, "business conditions have improved and capacity utilization has increased. Business investment has picked up in those parts of the country not directly affected by the decline in mining investment".

While acknowledging growth moderation in the first quarter, the central bank maintained the view that GDP growth would "increase gradually over the next couple of years to a little above 3%". On the job market, policymakers acknowledged the payroll growth but remained concerned over the subdued growth in total hours worked as well as wage growth remains. Policymakers warned that persistently low growth in wage would restrain household consumption.

Gulf rift may benefit Australia

Meanwhile, geopolitical uncertainty in Middle East is seen as a reason support Aussie this week. A boycott over Qatar is expected to disrupt the country’s exports, benefitting its rival, Australia, over LNG exports. Natural gas is Australia’s third largest exports in value terms, after iron ore and concentrates, and coal. It takes up 5.4% of the country’s total exports in 2014. Qatar is the largest exporter of LNG, producing around one-third of the LNG traded. Current development would disruption Qatar’s exports, benefiting Australia.

More in Arab Gulf’s Banning over Qatar Might Help Australia’s LNG Exports

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 110.27; (P) 110.50; (R1) 110.69; More…

USD/JPY’s decline accelerates to as low as 109.27 and intraday bias remains on the downside. Fall from 114.36 is expected to extend to retest 108.12 low first. Also whole decline from 118.65 is seen as a correction and is still in progress. Break of 108.12 will target 61.8% retracement of 98.97 to 118.65 at 106.48. We’ll look for bottoming signal around 106.48. On the upside, above 110.23 support turned resistance will turn bias neutral first. But near term outlook will remain bearish as long as 111.70 resistance holds.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. It’s uncertain whether it’s completed yet. But in case of another fall, downside should be contained by 61.8% retracement of 75.56 to 125.85 at 94.77 to bring rebound. Overall, rise from 75.56 is still expected to resume later after the correction from 125.85 completes.

Economic Indicators Update