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In our FX review this week, we take a look at the continued fall-out from spiking energy costs and how this is causing material weakness in the currencies of energy importers. As part of this we outline our new trade idea, short USD/JPY, and look at our performing long GBP/USD trade. Looking ahead to the coming week, we note important data out from both China and the UK.

Energy prices hurting importers

Natural gas prices remained elevated last week, putting pressure on the currencies of the largest energy importers. The three largest that we note are Japan, Europe and the UK. The main loser last week was the Japanese Yen. It traded to levels not seen since 2018, breaking above the 114 barrier on Friday.

Although we did see some underperformance in EUR and GBP, the Yen was by far the worst of the bunch. One reason we flag for this is the fact that JPY is also seen as a safe haven currency. With equity markets performing well last week, risk in general traded well, without much need to hedge via buying Yen.

We like to get short the pair, as we noted in our QuickPick that can be read here. We think energy prices will start to fall lower, and wouldn’t be surprised to see Government intervention if prices don’t consolidate. Heading into winter, the situation with Covid-19 is still a broad unknown, so adding Yen as a safe haven allocation seems a wise move. 

Sterling gains ground

The British Pound did struggle to shake off issues relating to energy prices, but did finish higher against most peers. For example, EUR/GBP posted fresh lows not seen since February 2020 when it dipped below 0.8450.

The main driver for this is continued pricing in of a rate hike from the Bank of England in the near future. Although it only looks to be a 0.1-0.25% hike, the fact that tightening monetary policy is occurring sooner than expected is a positive for the pound. When we compare this to the US Fed (who are looking to move this time next year), the difference can be clearly seen.

GBP/USD has now bounced into the mid 1.37’s, and we continue to hold our profitable position to target higher levels still in coming weeks.

China and UK data in focus

Looking to next week, we get a host of data points that could move the markets. Early on Monday we get Chinese Q3 GDP and Retail Sales figures. Both are important, given concerns about the slowdown in Chinese activity that we’ve spoken of previously in our FX review.

Later in the week we also get UK inflation on Wednesday for September. Given that one of the main reasons the Bank of England is looking to raise rates is due to inflation being above the 2% target level, this figure is key. If it comes out higher than expected, then we wouldn’t rule out a rate hike before the end of this year.

Overall, plenty of action in our FX review to generate good trade ideas from.

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