Hope won’t knock USD strength vs yen
Japan’s Prime Minister Shinzo Abe will win the upcoming election in late October, and thereafter continue with his stimulus programme known as ‘Abenomics’. This is our baseline forecast, which combined with a solid American economy and rising US interest rates will buoy the greenback against Japan’s yen. Over the past year, the dollar has gone from buying only 100 yen to now buying around 113.
Still, JPY’s has slowed, given an unexpected emergence of a popular competitor to Abe. Tokyo’s Governor Yuriko Koike has thrown her hat in the prime ministerial ring by forming a new ‘Party of Hope’. We doubt she will win, but Hope is likely to win seats and so weaken Abe’s rule.
Pound to stay calm and carry on
We remain GBP buyers on any Brexit-generated weakness. EUR/GBP should find support near its 200-day moving average at 0.8725 Euros, with a recovery bouncing it towards 0.8885.
Hard Brexit is overrated. We believe soft Brexit will be the final outcome. Besides, the UK economy’s disregard of Brexit (consumers are buying!) will force the Bank of England to challenge inflation and tighten money anyway. After Prime Minister Theresa May’s speech last week in Florence, where she laid out her Brexian vision, markets are relieved that both parties finally seem willing to compromise. The UK accepts it must pay an ‘exit fee’, and the European Union has signalled willingness not to gouge Britain with the bill. Political noise will persist, but we foresee a kinder, gentler Brexit.
NZD to underperform
Given weak inflation, a hung parliament and ambitious exporters, New Zealand’s central bank is in no hurry to tighten the purse. Today the Reserve Bank of New Zealand held its official cash rates unchanged at 1.75%.
The RBNZ’s Acting Governor Grant Spencer, who just took office yesterday, left options open as to what comes next. The RBNZ highlighted that policy will remain “accommodative for a considerable period” and given broad uncertainties, policy “may need to adjust accordingly.” Finally, the RBNZ said that global economic growth has continued to improve while inflation and wage pressure dynamics remain subdued.
