Japanese data give upbeat vibes

Japan reported the fastest growth in corporate service prices in 8 months overnight. That and a flow of funds out of Japanese Government bonds gave heavy hints that recovery is on the way and that international investors are feeling emboldened by the data. Confident investors tend to sell government bonds (safe havens and invest in potentially higher-yielding assets but with a little more risk. The GBPJPY exchange rate has risen by nearly 4 yen in the past 4 days and starts Thursday at JPY 154.75.

That growing confidence also boosted the New Zealand Dollar. Higher NZ interest rates have pushed the GBPNZD rate back down from the nosebleed inducing NZD 1.9950 earlier in the week. That rate is at NZD 1.9780 this morning. Whilst the perception that NZ interest rates will start rising in Q3 2022 doesn’t look like enough to strengthen the kiwi dollar now, it is a long way off after all; bond traders look at long-term yields and bond trading is a major influence on currency flows.

GBP trying to surmount €1.17

Sterling is stronger elsewhere though after a very solid performance in yesterday’s PMI indices. The composite index was the strongest since 1998, so the positives are obvious. However, there are headwinds. International shipping costs and the lagging impact of border controls, re Brexit, are contributing to sharp rises in imported goods costs. Some of our readers will be all too familiar with that frustration. That will feed into inflation, so we may see a faster return to more normal levels of consumer inflation than expected. The BOE’s sanguine nature may be tested in the last half of 2021. Hence GBP is pushing up to USD 1.3960 again and GBPEUR is trying to stay above EUR 1.17 as I write.

BOE on hold but future plans will drive Sterling

The aforementioned Bank of England will announce the current interest rate policy today. No change will come right now but the meeting minutes should show discussion about the growing inflation pressured and that ought to drive further GBP strength.

The European Central Bank is also in play today. They will publish their economic bulletin. The euro is under a little pressure from the Pound, as evidenced by the GBPEUR back up to 1.17 but is recovering a little against the US Dollar. That exchange rate is back above $1.19 but only making glacial gainst against the beleaguered US Dollar.

US GDP awaits

Speaking of which, all eyes will be on the greenback this afternoon. US gross domestic product data for Q1 should show something like 6.4% economic growth in the 3 months to March and we are forecasting a healthy rebound in durable goods orders. We also expect to see another fall in the number of fresh unemployment claims.

The direction of the US Dollar depends on the results of all of the above but that direction is questionable. Do investors see good data as a reason to sell US safe-haven assets and look elsewhere – weakening the USD, or do they see it as a reason to invest in the US recovery – strengthening the USD? That is a hard one to call and will depend on which country is likely to start raising their base rate first. NZ is a prime candidate for that and perhaps the UK too.

We will see the NZ trade date tonight. If they can post anything more than NZD 730 as a surplus, the Kiwi Dollar will almost certainly strengthen. So beware of that.

And now to two two-two draws last night. That means England will face Germany in the next round of the Euro 2020 cup. The scourge of English football, our bête noir, our kryptonite, our arch-rivals, our nemesis, our ultimate adversary. Strewth, I hope there aren’t penalties at the end.

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