Often with markets it’s a case of knowing whether the tail is wagging the dog. In other words, to what degree is the turmoil in markets a reflection of the financial risks and real economy, or is the ultimate risks to the real economy that are driving the volatility in markets. The reality is that it’s often an inter-play between the two and it’s in this light that the price action of this week should be viewed under. In FX, this has been most apparent in the yen, which has powered USDJPY from nearly 122.00 at the start of the month, to 111.00, then to the 114-115 area in the recent correction. The correction is modest in light of the move seen, didn’t pass the key Fibonacci level (38.2%) and USDJPY moved lower yesterday and in the Asia session. So whilst we’ve seen some positive signs other markets (such has high levels of corporate bond issuance yesterday, including USD 12 bln from Apple), there remains a message of caution from FX markets.
For today, it’s the yuan that has caught the attention, with the fixing on USDCNY higher for the past two sessions and this reversing the strengthening of the yuan seen for most of the year to date. It’s sometimes difficult to interpret some of these moves on the Chinese currency, but it can be said that it seems the authorities don’t want the currency to be seen as a one-way bet in either direction. We have minutes to the January FOMC meeting later today, but these should be seen as low risk given that markets are not expecting any moves from the US central bank in the coming months. We also see UK labour market data at 09:30 GMT, which could be in greater focus given the volatility seen in sterling yesterday. Given the lack of reversal seen so far today, then it could be that any firmer data is taken as a selling opportunity, given the current negative tone on the UK currency.