During Monday’s Asian session, there was further speculation that plans to raise the sales tax would have a damaging impact on the Japanese economy and potentially weaken the yen, at least in the medium term. The complications for the government and yen were illustrated by Moody’s warning that a delay in introducing a tax increase would be damaging and risk further medium-term ratings downgrades on fiscal vulnerability which puts the government between a rock and a hard place.
The latest Japanese trade data was weaker than expected with an increase in the deficit to a seasonally adjusted JPY0.94trn from JPY0.66trn previously as imports surged. In this environment, the yen was unable to gain ground as the dollar also found solid support on yield grounds.
The latest CFTC positioning data recorded a decline in net dollar longs for the fourth successive week to US$17.6bn from US$21.6bn previously. There was also an increase in net Euro longs of near 10,000 to just over 16,000 contracts. The positioning bias provided some dollar protection and a reluctance to sell the currency aggressively.
EUR/USD still found protection close to the 1.33 level even with retail investors continuing to sell the pair and there was a spike higher during European trading following the Bundesbank monthly report. The German central bank stated that forward guidance is not unconditional and does not mark a change in the ECB’s monetary policy strategy. The Bundesbank also stated that the guidance did not rule out the possibility of higher interest rates if greater inflation pressure emerges. EUR/USD pushed to a high in the 1.3375 area in very subdued trading conditions as European holidays took a toll.
Emerging-market currencies remained under pressure with the Indian and rupee and Indonesian rupiah both falling sharply again as markets fretted over the impact of higher US bond yields. It was again notable that the dollar struggled to gain ground against the European majors despite strength against emerging currencies.
The CBI organisation raised its UK GDP forecasts, maintaining the run of favourable data releases and the decline in house prices in the Rightmove was seasonal with the annual increase at over 5%. The underlying Sterling tone remained positive and, after holding above support in the 1.56 area, there was a fresh challenge on resistance levels above 1.5650 during the European session.