Yen on a roller coaster ride

* Quiet day for data
* Dollar finished lower
* Lower oil price impact
* Stimulus efforts

And Now, Today’s A Pfennig For Your Thoughts.

Good Day. And welcome to Tuesday morning. Since both Frank and Chris are in Vancouver for the remainder of the week, I’ll be steering the ship through Friday with the help of Dane Moody, who is our newest Pfennig contributor. The currency market was smooth sailing for the most part, but the stock market and oil spent most of the day in the red. Frank will kick things off this morning with some thoughts from up north.

“Arriving here in Vancouver late afternoon I went to dinner with some local friends from long ago and far away. It was a marvelous evening with The Lift resplendent in the evening sunshine. In contrast to Saint Louis, we became hot at the end of dinner and had to ask for the shade to be drawn a bit. It isn’t 95 degrees and high humidity, but thermonuclear radiation feels hot no matter where you experience it. After saying adieu, I walked down the seawall promenade in Coal Harbor. It was an active scene with restaurants, bikers, walkers, and folks relaxing on the grass along the walkway. It’s reminiscent of Seurat’s “Afternoon on La Grande Jatte” and all its parodies in a way. The sun cuts deep here – the light is intense yet so far from the equator.

There is no doubting that Vancouver is a bustle. Traffic is insane. The streets are full and the business talk in the cafes is intense. Housing prices feel like they are at a bubble level. Commodities have, for the most part, seen significant increases already this year after a crash in the first 21 days. Looking back on that first three weeks reveals a different market attitude. Within the first days of this year, most major indicators were way down compelling the New York Times to use the term “Plummeting Markets” to describe the action. Fast forward six months, and while it isn’t all peaches and cream, large chucks of our favorite asset classes have moved higher against a formidable headwind.

The real question it seems is – does the economy have the wherewithal to sustain itself when and if the Fed relaxes it’s support completely? For such this boost has been reduced and we are still here at these levels. But withdraw more or pull out entirely – now that’s a horse of a different color. I’m not convinced that we’re going to see that again this year. Maybe once somewhere to save misperceived “face”, but certainly no major moves up appear to be in store.”

Thanks Frank. The headlines were quite sparse yesterday as data was at a minimum and we remain in that awkward period leading up to the conclusion of the Fed meeting. Nonetheless, Dane Moody had this to share with us this morning.

“As promised, there wasn’t much in the way of data to focus on for the Monday trading day. The only data released in the US was the Dallas Fed Manufacturing Index, which came in at – 1.3 in July – a vast improvement from the -18.30 reading in June.

This morning offers up some interesting data with US consumer confidence and new home sales reporting mid-morning. Reuters’ poll shows that the experts see consumer confidence falling slightly from the June mark of 98.0 but new home sales bouncing back from the -6% reading in May. Today also marks the beginning of the July FOMC meeting, so we’ll have an interest rate announcement at the conclusion of the meeting on Wednesday.”

As Dane mentioned, there wasn’t anything substantial from a US data perspective that pushed the markets one way or the other yesterday, so traders were left with macro factors such as central bank meetings and potential Brexit fallout for direction. As a result, the currency market was largely subdued. While the dollar index finished the day lower, we had a fair share of currencies that actually finished with losses. If you recall, the dollar index is most heavily weighted toward euros, so from a practicality standpoint, its really a measure of the USD/EUR exchange rate. In fact, the euro, yen, and pound sterling account for over 80% of the dollar index. Since all three of those currencies finished the day with positive returns, the dollar index was subsequently lower on the day.

Of the currencies that ended in positive territory, there were not any that had more than a 0.25% gain. If we switch gears to the flip side, most of the currencies with losses were in the same boat as many had very small moves. The Canadian dollar, Brazilian real, Russian ruble, and Mexican peso were the only currencies that had experienced noticeable movements, albeit in the wrong direction. The Russian ruble and Mexican peso both lost over 1% on the day as oil prices took another hit amid oversupply issues while the real came in slightly better with a 0.90% loss.

The Brazilian central bank intervened in the currency market to push the real lower and economic growth forecasts were adjusted downward, so there was some substance on the lower real. Ultimately, it wasn’t a very good day for the emerging markets since most of the losses were concentrated in this complex as traders are trying to avoid heightened risk assets heading into the Fed meeting on Wednesday. The rand lost about 0.50% on the day after Fitch Ratings downgraded South Africa’s local currency debt rating and kept the outlook at stable.

As I came in this morning, the dollar index is trending lower after the Japanese Finance Minister offered some commentary that seems to indicate a lower than expected trajectory for additional stimulus measures. As a result, the yen is the best performer so far this morning as it currently sits on a 1.30% gain. The yen’s rise has also carried with it most other Asian currencies as well as the Australian and New Zealand dollars, although we did see a June trade surplus out of New Zealand. As thoughts are swirling that Japan may come in lower than initial expectations, the opposite seems to be emerging in Britain. A Bank of England policy maker, Martin Weale, has endorsed the idea of immediate additional stimulus so additional fiscal stimulus measures may be ramping up. Other than that, most currencies are pretty quiet so far this morning.

Currencies today 7/26/16. American Style: A$ .7529, kiwi .7063, C$ .7555, euro 1.0995, sterling 1.3128, Swiss $1.0116 European Style: rand 14.4150, krone 8.5765, SEK 8.6466, forint 284.55, zloty 3.9674, koruna 24.555, RUB 66.25, yen 104.26, sing 1.3565, HKD 7.7566, INR 67.3262, China 6.6778, pesos 18.8050, BRL 3.2791, Dollar Index 97.096, Oil $42.55, 10-year 1.55%, Silver $19.63, Platinum $1,087.30, Palladium $684.30, and Gold $1,319.50.

Mike Meyer
Vice President
EverBank World Markets