GBP/USD strikes 8-month high

MARKETS

The US dollar rolled over again on Friday in the wake of Fed Chair Powell’s announcement on average inflation targeting and helped the British pound reach an 8-month high. The Japanese yen initially dropped on news Prime Minister Shinzo Abe would resign but bounced again amid the dollar weakness.  

Gold had a strong comeback on Friday, finishing the week in positive territory after having slumped on Thursday in the wake of Fed Chair Powell’s speech at Jackson Hole. Oil prices finished Friday lower but enjoyed a 6th positive week in seven, buoyed by the temporary supply disruption from Hurricane Laura.

The S&P 500 notched up a sixth successive record high and its first close above 3,500. The Dow Jones rose too, erasing its 2020 losses but is still out of reach of a new record. If the S&P 500 holds onto Friday’s gains, it will be the best August since 1984. 

GURU WISDOM

“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” – Warren Buffet
 

JPY & Abe

Political opinion is of course divided on Japanese PM Shinzo Abe but as Japan’s longest serving post-war Prime Minister, his departure creates some uncertainty that could weigh on Japnese markets. He gave his name to the economic policy known as ‘Abenomics’, which included the ‘three arrows’ of ultra-accomodative monetary policy, loser fiscal policy and structural reforms. 

We would argue the policy has achieved a much weaker Japanese yen but not much else. For example Japan’s GDP in Q2 2020 was ¥485 trillion, lower than the ¥504 trillion in Q1 of 2013 when he took office. The fear that the Bank of Japan might reverse course from QE and negative interest rates under a new Prime Minister is partly why the yen rallied on Friday. We think the Bank of Japan is as they say - in a hole and won’t stop digging- which means a continuation of the current policy until it breaks.

Specifically on USD/JPY, another multi-day trend of dollar weakness could push it below 105 and we suspect the Bank of Japan will not verbally intervene unless it reaches closes to 100.