Yen slips, sterling surges after Bank of England holds steady

For the week, the dollar has jumped 5.6 per cent against the yen, putting the greenback on track for its best weekly performance versus the yen since February 1999. Investors had largely expected a rate cut following Britain’s vote to leave the European Union. But it was the yen’s moves that dominated morning trading in London, sliding past 105 per dollar and 140 yen per pound, with dealers citing a Bloomberg report saying ex-Federal Reserve chief Ben Bernanke had raised the prospect of the BoJ issuing “perpetual bonds”.

“If sterling rises because the Bank of England left interest rates unchanged and some part of the market was disappointed, the rally should be sold”, she said.

Signs that policy makers from Tokyo to London would respond with stimulus to prevent a Brexit-driven slowdown pushed the yen down at least 3 per cent against all of its 31 major peers this week. Something will happen on that front.

Another key focus is how soon the BoE’s Monetary Policy Committee could sanction a new round of quantitative easing, said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong. “That does seem possible”.

The U.S. dollar USDJPY, +0.51% at ¥105.72, compared with ¥105.35 late Thursday in NY.

Pivoting to Asia, a sharp pullback for the Japanese yen and a surge for Japan’s Nikkei index occurred this past week on a resurgence of support for Japanese Prime Minister Shinzo Abe’s brand of economic stimulus after his party’s landslide political victory last weekend.

While the yen has managed to regain some footing after government and central bank officials directly involved in policymaking said there is no chance that Japan will resort to ” helicopter money”, traders will be keeping close eyes on any fresh news on this topic. That combined with anticipation that the Japanese government could launch a 10 trillion yen fiscal stimulus program to coincide with further easing from the BOJ boosted sentiment toward riskier assets.

The Pound rose strongly following the BOE announcement that it was holding back from introducing more stimulus to the United Kingdom economy. “Remember it took six months the first time for the details of Abenomics to come out, and in that time the dollar moved from 80 to 100 yen”.

Still, sterling rose almost 2 percent for the week against the greenback thanks to a surprise decision by the BOE on Thursday to keep rates on hold.

Sterling jetted higher against the yen and the euro after the Bank of England decision. If there are any surprises before then, though, the dollar could see a major surge while stocks could be pressured to retreat significantly from their highs.

“There was an initial kneejerk but $1.35 saw significant resistance”, said BMO Capital Markets currency strategist Stephen Gallo.

Looking forward, the big question remains as to how the central bank policies of the UK, Japan, as well as the persistently dovish ECB, may or may not affect the US Federal Reserve and, in turn, the US dollar and global equity markets.