Trade up to JPY strengthExternal balances became fashionable once again in the FX market during 2013. As fears about US tapering took hold, the dividing line between success and failure in emerging markets was largely defined by the health or otherwise of the current account balance. To judge by on-going EM FX trauma, the early signs for 2014 are that the balance of payments will remain central to many EM currencies. But this fixation may spread to engulf other currencies also. In Europe, the improvement in the Eurozone’s current account balance has already been offered by some as an explanation for the EUR’s resilience – a view we dispute. If we believe the market is paying too much attention to the Eurozone’s current account, we suspect it is paying too little attention to the UK’s troubling visible trade deficit which will likely see GBP substantially weaker in H2 14. Given the market’s predilection for further JPY weakness, Japan’s deteriorating current account balance would be a tempting rationale for JPY bearishness. However, we believe the opposite is true. Japan’s external tribulations are set to become a catalyst for JPY strength, not weakness.
Read the full report: Global Research