ETF Securities – Geopolitical concerns jostle with economic outlook for upper hand in FX performance. Downside risks for JPY if economic outlook deteriorates. The Japanese Yen has rallied on the back of the surprising improvement in economic activity and geopolitical tensions stemming from the Ukraine/Russia crisis , as domestic investors have hedged or partially unwound foreign asset positions.
The Bank of Japan also failed to change to its policy stance. Despite the improving outlook for growth and prices recently, we expect some fade in the recovery as the ‘front-loading’ effects of the sales tax fade. This week’s retail trade and CPI data will give further clarity on the state of the economy.
The Pound has come off recent multi-year highs and remains vulnerable. We feel that all the positive news on the economic front has been priced in and the market is overstating the chances of rate hikes in 2015. The Bank of England (BOE) noted the ‘significant spare capacity’ in the economy, which is likely to keep any price pressure at bay. BOE reiterated the risks emanating from a frothy housing market, but appears loathe to deal with the issue via interest rates. House data this week will guide the need for further measures to reign in prices.
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