Is Yen Losing Its Safe Haven Bid?

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Market Drivers for April 21 2014

Japanese Trade Balance wider than expected

Pound perks up on growth expectations, possible M&A flows

Nikkei -0.03% Europe closed

Oil $104/bbl

Gold $1288/oz.

Europe and Asia:

JPY Trade Balance -1.71 vs. -1.27

North America:

USD LEI 10:00 AM

It been a very quiet open to the week’s trade in the currency market as most of the European and Commonwealth markets remain closed for Easter Monday holiday. In Asia the main news came from Japan where the Trade data missed its mark and provided a catalyst for further yen weakening.

Japanese trade came in at a 1.7B deficit versus forecasts of 1.4B and worse than the month prior gap of 1.1B. Exports rose by only 1.8% versus 6.5% expected while imports soared by 18.1% versus projections of 16.2% rise. This was the 21 straight month that Japan has run a trade deficit as the country’s current account condition continues to deteriorate due to slowing exports and rising energy import costs.

The surge in imports was also driven by the sharp rise in consumer spending ahead of the April sales tax hike. Department store sales rose by a whopping 25.4% – the biggest monthly rise since 1991.

As Japan’s current account condition conditions continues to deteriorate, the yen’s function as a safe haven harbor may come into question. Indeed today’s poor results on the Trade data caused USD/JPY to tick up to 102.70 before easing back to 102.50 by morning London trade. In the short run however, the flows in USD/JPY will continue to be dominated by US data and US rates. The latest rally in the pair from its sub 102.00 levels last week is the result of better US economic fundamentals and the uptick in US 10 year rates.

Elsewhere, cable saw a small boost as well with the pair rising above the 1.6800 figure by morning European dealing. The Center for Economics and Business Research projected that UK economy would grow at 3.1% rate – the strongest rate since 2007. Many market analysts now expect that the BoE will be the first of the G-7 central bank to hike rates perhaps as early as the second half of 2014.

Another possible reason for pound strength was speculation of a potential bid by Pfizer for UK pharmaceutical giant AstraZeneca. The deal could create a 150B giant, although both companies remain tight lipped about progress in the negotiations. Meanwhile currency traders may be trying to get ahead of the news for the possible M&A flow impact on GBP/USD with potential of possible 50B GBP going into the deal.

With North American markets open, but calendar essentially barren, trading may remain at half-staff for the rest of the day with majors holding on to their narrow ranges. If US equities see a rally, USD/JPY could test the upper end of today’s range and possibly make a run towards the 103.00 figure as the day progresses.

Boris Schlossberg
Managing Director

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