Following a sharp sell off for most of 2016, which accelerated after Brexit, GBP/JPY rallied in December thanks to the election of Donald Trump. In 2017, the pair has mostly traded in a range without any clear long-term trend. The exchange rate has repeatedly sold off on political risks (particularly relating to North Korea), while gaining when tensions subside.
The British pound is higher today (particularly against the US dollar), and has been strengthening throughout the week. Thanks to strong regional growth and rising rate hike expectations, the British pound remains in a bullish trend. Pound sterling is also benefiting from a particularly weak US dollar, which is currently trading at 3-year lows. Compared to its key regional peers (such as the euro), the pound is relatively weaker. Unfortunately, Brexit-related risks and relatively weaker economic growth continue to weigh on GBP. Turning to the latest Brexit news, the British government is proposing "mutual recognition" as a means to preserve financial services access to the EU. According to the Financial Times, the proposal calls for the UK and the EU to recognize each other's regulatory regimes as equivalent at the point of Brexit. Any future divergences would be monitored by an independent mechanism. The proposal is likely to be contentious, given that Michel Barnier has repeatedly ruled out access to the single market unless the UK accepts conditions including the free movement of people. Our short-term outlook on the pound is neutral, while our medium-term outlook is bullish.
GBP/USD is currently above 1.4120. EUR/GBP is flat, with the exchange rate above 0.8870. The pound is flat against the Australian dollar and the Canadian dollar. GBP/AUD is currently above 1.7720, while GBP/CAD is above 1.7610.
Looking at UK economic data this week, traders will be watching upcoming inflation and retail sales figures. The consumer price index (3% vs. 2.9% expected) was ahead of expectations. The retail price index (4% vs. 4.1% expected) were slightly below estimates while the producer price index (4.7% vs. 4.2% expected) was ahead of expectations. Later today, we'll see retail sales growth. Expectations remain low, given recent weakness in UK consumer spending. Last week, the Bank of England signaled a positive economic outlook while Markit/CIPS services PMIs were below expectations.
The Japanese yen continues to strengthen today, particularly against the US dollar. As a safe haven currency, the yen tends to weaken when global growth is accelerating and strengthens during downturns. While the yen began rising following fears of an extended stock market rout, the currency continues to strengthen despite a rebound in most global stock markets. Looking at Japanese domestic data, weak quarterly GDP growth figures and falling machinery exports helped yen strength this week. Turning to monetary policy, the current Bank of Japan Governor Haruhiko Kuroda was appointed for a rare second term, despite his age (73). Kuroda was appointed alongside deputies including BoJ executive director Masayoshi Amamiya and Waseda University professor Masazumi Wakatabe. Both are well-known for their pro-monetary easing views. Unfortunately for the yen, this isn't enough to change the course of the currency as it continues to strengthen. Our short-term and medium-term outlook on the yen remains bullish.
USD/JPY is currently trading above 105.80. EUR/JPY is currently flat and trading above 132.70.
Looking at Japanese economic data, traders will be focused on upcoming GDP figures. Annualized QoQ GDP growth numbers (0.5% vs. 0.9% expected) widely missed estimates. Machinery orders (-5% vs. 2.2% expected) missed expectations by a very wide margin due to falling exports. Industrial output (2.9% vs. 0.5% prior) was higher than previous figures. Cross-border stock (-¥429.5b) and bond (-¥973.2b) investments continue to suggest capital inflows into the country. Last week, cross-border figures also showed that capital was flowing into Japan (strengthening the yen).
As the pair runs out of steam, we are downgrading GBP/JPY to neutral. The pair is now trading within a normal range in the short-term. Our analysis is based on various technical indicators when looking at a daily chart.
As the pair continues to strengthen, we are upgrading GBP/JPY to bullish. The pair is now trading within a normal range, based on various technical indicators looking at a weekly chart.
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our last take on the British pound in early January, we wrote that the currency was set to keep strengthening thanks to strong regional growth, moderate sentiment and the historically low value of the pound. More specifically, the currency looks cheap based on broad nominal effective exchange rates (a measure of the pound relative to other foreign currencies). Looking at GBP/USD since our last…
Looking at this week’s COT report, the British pound is now at a bullish extreme, while the Australian dollar is no longer at a bearish extreme. Bullish extremes continue in long euro and long crude oil speculator net positions. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direct…
In early 2017, doubts regarding the integrity of the Eurozone led many to take refuge in the Japanese yen. Unlike the euro, the Japanese yen exhibits classic safe haven characteristics and tends to strengthen during downturns. Following the Brexit referendum vote and US presidential elections, few were willing to bet on opinion polls that predicted Macron’s victory. Similar to political events in…
Japan has suffered from weak growth and inflation since the global financial crisis, and the Bank of Japan has frequently experimented with unorthodox monetary policies. In September 2016, the BoJ decided to directly target long-term interest rates. The so-called “yield curve control” (YCC) program fixed 10-year Japanese government bond (JGB) yields at 0%. If yields deviated from the BoJ’s target…
As the Bank of Japan is one of the world’s most dovish central banks, market expectations for this week’s upcoming event are very limited. Governor Haruhiko Kuroda, who has overseen a $4T quantitative easing program and negative interest rates over his 5-year term at the Bank, is an unlikely candidate to bring about hawkish monetary policies. This is especially the case as domestic inflation rema…
Significance of the GBP/JPY pair
British pound to Japanese yen is one of the most popular currency pairs amongst speculators. This is because the pair is fairly volatile, traded in large quantities and tends to reflect global risk sentiment. Looking at the pound, the currency tends to appreciate during economic booms while selling off sharply during times of peril. Given the UK’s close economic relationship with the Eurozone, the currency also tends to track the fortunes of the euro. The United Kingdom is the world’s fifth-largest economy. Given the relatively low yield of the yen, the currency tends to depreciate when growth is strong as investors seek higher returns outside Japan. During downturns, the yen tends to appreciate sharply as yen-based investors sell international assets in exchange for the currency. Japan is the world’s third-largest economy (or fourth-largest if one counts the Eurozone as an economic region). As a pair, GBP/JPY tends to be volatile given the underlying characteristics of the yen and the pound. Relative GDP growth rates for the United Kingdom versus Japan are highlighted below:
2005 – mid-2007: The good times
Between 2005 and mid-2007, optimism for global growth was running high. European currencies including the euro and the British pound rallied sharply, while the yen broadly weakened. The yen was particularly weak as the currency was used as a funding currency for the carry trade. When speculators engage in the carry trade, they borrow a currency with low interest rates (such as the yen) and invest the proceeds in currencies that offer relatively higher interest rates (such as the British pound). Thus the yen weakened during this time while the pound strengthened. From around 190 at the start of 2005, GBP/JPY peaked right under 250 in July 2007.
Mid-2007 – mid-2008: Early jitters
Over the summer of 2007, currency speculators began buying back the yen as global GDP growth began trending down. Given that many carry traders employed significant leverage, gains in the yen were magnified as a result. Growing troubles in the US housing market were particularly worrisome, although most believed that troubles in the sector would be confined to the US. Nonetheless, the British pound began selling off given London’s significant exposure to the US banking sector. Between July 2007 and July 2007, GBP/JPY weakened down to 214.
Mid-2008 – mid-2009: The global financial crisis
By the summer of 2008, the domestic US housing crisis had transformed into a global financial crisis. By June 2008, many global currencies including the British pound, euro and the Australian dollar began selling off sharply. Currencies that gained during this time included the US dollar and the Japanese yen. As we wrote earlier, the upheaval in the foreign exchange market was caused by the global US dollar shortage. Prior to the crisis, international banks borrowed heavily in offshore US dollar (Eurodollar) lending markets. Once Eurodollar lenders began doubting the creditworthiness of borrowers, banks were unable to roll-over their US dollar liabilities. As fears grew, the foreign exchange market sensed panic and the US dollar rose sharply as a result.
Looking at GBP/JPY, the pair bottomed in January 2009 around 122. Following a bear market rally, the pair made a long term top around 162 in August 2009.
Mid-2009 – late-2012: The zero interest rate era
Prior to the financial crisis, the yen enjoyed a natural tailwind thanks to very low interest rates relative to major currencies. As described previously, this resulted in the yen being used as a funding currency in the carry trade. Following the crisis, many central banks reduced interest rates substantially (including the Bank of England). Thus interest rate differentials fell, strengthening the yen. Between late 2009 and late 2012, the yen strengthened against most major currencies.
While the Bank of Japan directly intervened in markets four times between 2010 and 2011, this had a limited impact on the GBP/JPY exchange rate. By October 2012, GBP/JPY was trading around 127.
Late 2012 - 2016: BoE and BoJ move in opposite directions
The year 2012 was a tough year for the Japanese economy and its exporters, and the ruling Democratic Party of Japan government was deeply unpopular. The party’s political fortunes worsened after proposing significant increases to consumption tax. Shinzo Abe, the candidate from the Liberal Democratic Party, campaigned on a platform of economic reform. He named his policies “Abenomics” (inspired by Ronald Reagan’s “Reaganomics”) and it contained three specific priorities. Firstly, he called for significant monetary easing. Secondly, he called for a fiscal stimulus package. Lastly, he called for deep economic reforms. As Abe’s popularity rose in the polls, the yen began weakening as a result.
Following his victory in December 2012, the yen began weakening sharply. The next driver for the yen was the appointment of Haruhiko Kuroda as governor of the Bank of Japan in early 2013. In the first Bank of Japan meeting following Kuroda’s appointment, he announced a significant change to the Bank’s policies. Instead of targeting interest rates directly, the BoJ was set to dramatically increase the size of asset buying program. Specifically, he targeted the purchase of Japanese government bonds, corporate bonds and equities. He further pledged the double the size of the Bank’s balance sheet by the end of 2014. By early 2014, GBP/JPY was trading above 170.
By late 2014, GBP/JPY was once again gaining due to yen weakness. This time, the sharp sell-off in global crude oil prices drove the yen down. While the Bank of England had hinted at rate hikes in 2014, the Bank of Japan was firmly committed to monetary easing. After peaking around 196 in June 2015, GBP/JPY ended the year around 170.
2016 – 2017: Brexit and back
Starting in late 2015, GBP/JPY began falling as the outlook for global GDP growth worsened. At the time, safe haven assets such as bonds and gold rallied. In the UK, markets were jittery as an upcoming Brexit referendum threatened the status quo. Prior to the Brexit vote in late June 2016, GBP/JPY traded around 160.
Following Brexit, the pound nosedived against the yen (and against most global currencies). As uncertainty clouded the outlook for British trading relations, the pound adjusted accordingly. Looking at GBP/JPY, the pair made a long-term bottom in October 2016 around 126. At this time, the Bank of Japan once again reverted to targeting interest rates (instead of the size of monetary easing). This time, Kuroda implemented a policy known as Yield Curve Control (YCC). Under YCC, 10-year Japanese government bond yields were fixed at 0% by the Bank’s traders. After the implementation of YCC, the yen became even more sensitive to interest rate differentials.
In November 2016, following the victory of Donald Trump in the US presidential elections, global bond yields rose sharply as markets priced in faster growth and inflation. In response, the yen weakened as Japanese yields were fixed at 0%. GBP/JPY ended 2016 around 144.
In 2017, the yen strengthened at a slow pace while the pound bounced back thanks to improving optimism regarding the Brexit negotiations. At times, we wrote that optimism in the British pound was approaching extremes. On the other hand, yen strength remained at bay thanks to weak guidance from the Bank of Japan. GBP/JPY ended the year around 152.