JPY Weakness
Yen weakness was the standout theme overnight in the European session. Domestic data in Japan showed further weakness in the current account (exports fell around 10% y/y), and the wider economy through a soft Tankan print, while renewed dovish rhetoric from the central bank also prompted some selling. We see scope for some modest further weakness, though any structural move higher in USDJPY will likely need a substantial move higher in relative rates, alongside some bold new policy measures from the BoJ’s side. The RBA often remarks that the Australian dollar is persistently trading above levels implied by fundamentals, but last night Board member Broadbent went further and for the first time clearly expressed a preference for a weaker currency. She said: “I would hope the Australian dollar gets a bit weaker going forward as the mining boom eases off…And then we might get a bit more of a boost from having the currency a bit lower, rather than the dampening effect of being higher.” On top of this, she also sounded less than confident about the prospects for a graceful handover between the mining and non-mining sectors of the economy: “If we can achieve a soft landing from the mining investment peak and have a bit of a build-up in housing and retail sales, then we will be very fortunate”. Although there was no currency reaction to the headlines, we consider the remarks to be significant and see them as reinforcing the view of our Australia economics team as they look for another RBA rate cut in November. The euro was indifferent to the outcome of Spanish regional elections which took place on Sunday. Prime Minister Rajoy’s Popular Party won in Galicia (Rajoy’s home region), while nationalist parties polled well in the Basque country. Attention now turns to elections in Catalonia on November 25, amid calls for greater autonomy for the region. Four G10 policy meetings are due this week, with the Bank of Canada’s on Tuesday offering perhaps the greatest scope for a policy surprise. After the soft Canadian CPI report released last week, we cannot exclude the possibility that the explicit tightening bias may be watered down in the policy statement – a development that could push USDCAD back above parity.
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