USDJPY Back to 110?

The price action in the currency and the bond market today tell us that investors believe data and not the Fed. The FOMC minutes were hawkish which is not a surprise considering that the central bank raised interest rates for the first time this year last month. Fed officials talked about lower downside global economic risks, greater upside in fiscal policy risk and described the January consumption slowdown as temporary. These optimistic views and their concern about high stock prices confirm that further tightening is on the way. Yet investors sold rather than bought dollars after the report because nothing in the Fed minutes reflected an urgency to raise interest rates. As a result U.S. yields nosedived, taking USD/JPY down with it as investors turned their focus to the meeting between U.S. President Trump and Chinese President Xi and Friday’s non-farm payrolls report. Data wise, this morning’s economic reports raised red flags for Friday’s non-farm payrolls report. While private payroll growth increased strongly according to ADP, job growth in the service sector fell to its lowest level since August. As the employment component of non-manufacturing ISM tends to have a very strong correlation with the broader release, investors sold dollars aggressively after seeing that Fed minutes contained nothing to alter the market’s expectations for tightening. We expect the dollar to continue to trend lower particularly against the Japanese Yen.

Politically, there’s a lot at stake at tomorrow’s summit between the leaders of the world’s two largest economies. Before the Summit, President Trump set the tone by saying this will be a difficult meeting. There are also many political issues at hand like the one China policy and North Korea but Trump has not been shy about his views on China’s unfair currency and trade policies. The BEST case scenario is that both leaders will shake hands, smile and talk about a stronger relationship. Unfortunately, they are walking into the Summit with a strained relationship as Trump rarely misses the opportunity to point fingers at China for its unfair trade practices having once described China as the world champion of currency manipulation and devaluation. FX traders should be nervous because Trump is unpredictable and it is not clear how hard he will press Xi. If the meeting ends with the same awkward press conference as the one held with German Chancellor Merkel, the markets won’t be happy and risk appetite could suffer. This would mean further losses for USD/JPY and other high beta currencies.

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Technically, the reversal in USD/JPY today puts the pair at risk of making another run for 110. The 4 hour chart shows resistance at the 50-period SMA near 111.00 and support at last month’s low of 110.07.

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