EUR/JPY ascent shows no sign of stopping

Data releases globally continue to show that economic conditions are strengthening. The latest indicator to lend support to this view was the January US jobs report, which taken together with past revisions revealed that job market conditions were better than previously thought over recent months. The report labelled as a “goldilocks” outcome also revealed a slight rise in the unemployment report, implying that there is little chance of any consequent shift in the Fed’s highly accommodative stance.

More broadly global manufacturing confidence indices also revealed gains (albeit with some divergence in Europe) and point to expansion in output in the months ahead in many countries. The data also suggest that weakening in economic indicators in Q4 last year including the surprise drop in US Q4 GDP was merely a setback rather than a renewed slide into recession. All of this leaves markets in rather buoyant mood as reflected in the ongoing gains in risk assets over the past few weeks and positive end to last week.

All is not rosy however, and politicians may yet ruin the day as political frictions in the US over spending cuts and a new budget have yet to be resolved. Meanwhile, elections in Italy on 24/25 February will provoke more nervousness as they approach. The EU Summit on 7/8 February will also be in focus as politicians attempt to salvage a deal on the EU budget after talks broke down in November 2012.

A light data calendar this week will mean that central bank decisions will garner most attention over coming days although I expect no change in policy from the European Central Bank, Bank of England and Reserve Bank of Australia. Risk assets will therefore not find any support from central banks this week. In particular the ECB’s stance of contracting its balance sheet continues to run counter to the more aggressive easing from other central banks, with the pain on an already weak Eurozone economy accentuated by a stronger EUR. Indeed, commercial banks’ LTRO repayments to the ECB may have helped to propel the EUR even higher.

Despite the ongoing upward momentum of USD/JPY the USD looks set to remain under downward pressure in general although there was notably some short covering according to the latest CFTC IMM report. The JPY shows no sign of reversing its losses as a combination of official rhetoric, improving risk appetite and growing use as a funding currency intensify the pressure on the currency. In particular, EUR/JPY’s ascent shows not sign of stalling into this week, with speculative longs in this currency pair at their highest level since May 2007.


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