The combination of upbeat U.S. data and more stimulus hopes contributed to the risk-on trade environment, sending Asian equities higher on Tuesday after the S&P 500 set a new record high on Monday.
Investors are betting on major central banks to keep taps wide open for the foreseeable future, and expectations of a large fiscal stimulus by Japan’s Prime Minister, Shinzo Abe, after his victory over the weekend’s upper house election will add additional support to risk-on trades.
Clarity on the U.K.’s leadership was another factor boosting investors’ appetite as Andrea Leadson suddenly dropped out of the race paving the way for Theresa May to become Britain’s new prime minister on Wednesday. However, the big question remains as to when Article 50 is going to be triggered, and how investors are going to react to U.K.’s official departure from the EU. Meaning that investors shouldn’t get over excited.
The British pound extended its recovery early Tuesday to trade above 1.3050, after dropping to a low of 1.2849 against the greenback on Monday. The relief rally led by political clarity is likely to be short-lived as many questions remain unanswered, and the immediate risk will be the BoE’s meeting on Thursday, which is likely to announce new stimulus measures in response to Britain’s shock vote to leave the EU. Today BoE’s Mark Carney will probably provide some hints as he appears in front of MP’s to answer questions on the central bank’s measures post the Brexit vote.
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USDJPY lost 3 big figures after touching 100 briefly on Friday. A coordinated action from Japan’s fiscal and monetary side is required to put an end for the Yen’s strength on the short run, and this is likely to happen in the weeks ahead, but it remains to be seen the exact size of the fiscal stimulus package to be announced.
The Aussie is the best performing currency today, up more than 0.7% against the greenback after data this morning from National Australia Bank showed that the business confidence index jumped to 6 in June from 3 in May. The upbeat data might provide some relief for Reserve Bank of Australia, despite most recent worries from Brexit and the potential downgrade to Australia’s credit rating.
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Hussein Sayed is chief market strategist at FXTM
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