London session: G20 continues to kill rally in USDJPY

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By Kathleen Brooks | February 16, 2013 1:17 AM EST

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The G20 meeting is in full swing and comments from various officials are flowing thick and fast. Japan's central bank governor Shirakawa has said he wants to "explain" the BOJ's current policy stance, while Brazil's finance minister Mantega, who first touted the idea of currency wars in 2010, said that Brazil won't allow over-appreciation in the real. This is sure to keep currency markets volatile as we move towards the end of the week.

In the G10 FX sphere the yen continues to be the biggest mover on the back of the G20 meeting. It has continued to appreciate today as the global political focus shifts to its rapid deterioration in recent months. USDJPY has been hovering around 92.50 so far today, which is 200 pips lower than where it was earlier this week. The yen was also helped by two other factors: 1, speculation that Toshiro Muto would be elected as the next governor of the Bank of Japan and he is considered less dovish than other candidates; and 2, the BOJ upgraded its economic outlook in its monthly economic survey, and said that "Japan's economy appears to stop weakening". This compares with January's statement: "Japan's economy remains relatively weak."

Can the yen continue to fall after the G20?


The question FX investors need to ask now is has the yen weakened enough and could the decline in USDJPY be more pronounced. From a technical perspective, if we get a weekly close below 92.20, a key support zone, then we could see a more pronounced decline back towards 91.75 and then 91.50. However, from a fundamental perspective there is still a case for a weaker yen as Japan remains mired in deflation, well below the 2% inflation target. Added to that, Japanese officials' scaling back of their yen-negative rhetoric in the lead up to the G20 may pay off dividends. While it is likely that the G20 communique, released tomorrow, will include a pledge towards market-based exchange rates, we believe the probability is low that Japan will be identified as a currency manipulator. Thus, with the G20 out of the way we could see USDJPY grind higher in the coming weeks back to 95.00 and beyond.

Limits of G20 intervention


Global officials can vent their frustrations at movements in the FX market, but there is very little they can do to stop a certain currency from depreciating, especially if there is a fundamental case for a weaker currency, as there is in Japan. Some of the comments coming out of the G20 sound rather petty: "your currency is in a better position than mine, and that's unfair"... I am sure some Japanese officials would trade Brazilian rates of growth in recent years over the Japanese economy and the state of the yen.

Snow derails UK retail sales


Elsewhere, the pound had a wild ride today, firstly recovering to 1.5540 then falling back to 1.5460 after extremely weak retail sales. Overall, retail sales including petrol fell 0.6% in January, much worse than the 0.5% gain expected. The ONS said that this was partly due to small retailers reporting a sharp drop in sales on the back of a prolonged bout of snow. Online sales were also higher, probably also as a result of the snow. In hindsight expectations probably were too high and economist models may not have made enough of the snow that covered large swathes of the country.

Do weak sales under-estimate the strength of the UK consumer?


Adverse weather conditions always make economic data harder to read. This was the first decline in monthly retail sales since April 2012; however there is a chance that the sharp and unexpected decline in sales could be reversed in February as the weather improved. Added to that, the UK economy is still creating jobs, so the decline in sales may not be a reflection of consumers' lack of confidence in their financial position and sales could pick up in the coming months.

This is a blow to GBP, however, we expect declines to be limited and we could range trade for the rest of the day between 1.5460 and 1.5550. We believe that there is further downside to come and we could fall back towards 1.5260 - the low from June 2012 in the medium-term. Although the pound is the second weakest performer after the yen so far this year, it has slipped under the radar of the G20. Thus, we doubt that the pound's decline will be too interrupted by the G20 meeting today and tomorrow.

EUR - potential for a mini-downtrend


Elsewhere, the euro continues to trade to the downside and is fast approaching an important level: 1.3290 - the 50-day moving average. Below here could be the start of a mini-downtrend back towards 1.3105 - the 100-day sma. I will be watching positioning data for this week to see if the speculative community scaled back on long euro positions this week after the dovish commentary form Mario Draghi at last week's ECB press conference. There are still heightened expectations of a cut to the deposit rate, potentially as early as the March meeting. Today the head of the Bundesbank said that the euro was not over-valued, and ECB head Mario Draghi also said that there are currently no signs of deflation, and the euro rate is around its long term average. This reinforces our belief that Draghi called a top in the euro last week around 1.36-37, and a move higher towards 1.40 is off the cards for now. This may have triggered a change in heart towards the euro from the market. We shall have to watch the CFTC data to get some evidence to find out if this is true. In the absence of other fundamental drivers today, the euro may find it hard to rally.

The Aussie has continued to recover after a sharp rise in consumer confidence earlier this week. It is running into resistance at 1.0375 - the 200-day sma. This could stymie the bulls for now. Added to that the Treasurer Wayne Swan has also said that the Aussie is too strong at the G20 meeting, so there is a chance that a shift in market sentiment could obstruct the Aussie's recovery and we could turn back towards the 1.0250 lows from last week.

Ahead today US economic data to watch for includes Empire manufacturing, industrial production and consumer confidence. Also watch out for further headlines from the G20.

One to Watch:



Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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