Japanese Yen rallies sharply as volatile week ends on a hopeful note

Enrique Díaz-Álvarez15/Feb/2016Currency Updates

Financial markets worldwide experienced a volatile week and currencies were no exception.

Major currencies had a mixed performance, with the Japanese Yen, Swiss Franc and, somewhat incongruously, the South African Rand posting big gains. The Yen experienced its largest two-week gain against the US Dollar since as far back as 1998, rising by 6% so far in 2016.

By contrast, the Brazilian Real and the Mexican Peso fell sharply, while most European currencies ended the week almost unchanged.

The highlight of the week was Federal Reserve Chair Janet Yellen’s testimony to Congress, where she struck a cautious, non-committal tone. The underlying message appears to be that a March interest rate hike remains very much on the cards, absent further significant market falls.

Risk assets in general had a rough time until Friday, when positive data out of the US fuelled a rebound that brought oil prices close to unchanged for the week and helped world equities erase roughly half their losses.

Recent market moves may be hinting that we saw some capitulation on Thursday. Friday’s rally in both the US Dollar and equities, despite fairly little news, may be a sign that stale positions on consensus 2015 views (long equities, long Dollar) have now been cleaned out. If this is the case, we would expect the Dollar to resume its gradual appreciation over the coming months.

Focus this week is on the Federal Reserve which, on Wednesday evening, will be releasing the minutes from its January FOMC meeting.

Major currencies in detail:


Last week was fairly short on significant economic news out of the UK.

We saw a disappointing industrial production print for the month of December, down -1.1%, though most of the weakness was driven by utility output and hence can be ascribed to the unseasonably warm weather.

Other indicators continue to be consistent with an economy growing around the 2.0% level and we still expect an interest rate hike from the Bank of England sooner than the market is pricing in. We think Sterling has already reached its lowest point, particularly against the Euro.


Economic data out of the Eurozone took a turn for the worse last week.

Growth in the fourth quarter of 2015 remained sluggish and the year-on-year figure dropped to 1.5% from 1.6% in the prior quarter. At the individual country level, both Portugal and Italy disappointed growth expectations.

Worse news came from the December industrial production figures, which defied expectations of a modest increase and shrank over 1%. This weakness makes it near certain that the ECB will announce further stimulus measures at its March meeting, which should help cap any increases for the common currency.


Last week’s positive news from both the labour market (JOLTS report, weekly claims) and retail sales appear to confirm that US domestic demand is weathering the market sell-off quite well.

Federal Reserve Chair Yellen struck a cautiously optimistic tone in her Monetary Report to the US Congress last week.

The gap between Yellen’s testimony and interest rate markets completely ruling out the possibility of a March hike, appears a serious mispricing and its correction should lead to further gains for the Dollar against most major currencies.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.