Market Drivers July 18, 2016

Risk on mildly onts
CNY at lowest rate since 2010
Nikkei holiday Dax -0.11%
Oil $46/bbl
Gold $1329/oz.

Europe and Asia:
NZD CPI 0.4% vs. 0.5%

North America:
USD NAHB Housing Index 8:30

It’s been a generally quiet open to the week in the currency market with most of the majors contained to generally tight ranges in Asian and early European trade as markets saw a mild risk on bias after the failed coup attempt in Turkey eased tension somewhat.

USD/JPY saw a furious rally that took it above the 106.00 level in very early Asia after Cabinet Minister Suga noted that Japan had tools for further easing. The Japanese markets are closed for holiday today so price action has been more muted, but yen saw some selling from the announced takeover deal of UK chip designer ARM holding by Japan’s Softbank.

GBP/JPY has been the primary beneficiary of flows rising above the 140.00 figure as the all cash $32 Billion deal is significant in size. Given cable’s sharp decline this may be only the start of M&A activity for UK’s multinational companies as the 12% decline in sterling since the Brexit vote now makes many UK assets more attractive to corporate buyers.

Sterling also saw a mild boost from rather hawkish comments from MPC’s Weale who stated that he wasn’t sure if he would back rate cuts at the August meeting stating that he saw no panic in either households or companies. This week the market will get the release of UK labor data and if the numbers prove supportive cable could rally further as the fallout from Brexit appears limited.

The primary reason that UK has yet to see a steep falloff in demand is because the prospect of actual separation from EU may be years down the road. It must be remembered that new Prime Minister Theresa May campaigned on the Remain side and although she has made all the proper assurances that Brexit will go through she has also made it abundantly clear that she will not invoke Article 50 for at least 2 years. The markets may therefore begin to dismiss the significance of the Brexit vote if the economic situation remains status quo.

In North America today the calendar is light with only NAHB Housing data on tap. The FX markets will likely look to equities for clues and if stock continue their rally the risk on theme could gain momentum as the day proceeds pushing USD/JPY to a test of the 106.00 level once again.

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