Article / 26 May 2016 at 7:36 GMT

FX Update: USD bulls need USDJPY rally, or else

Head of FX Strategy / Saxo Bank
  • USDJPY back below 110 in mysterious move lacking clear catalyst
  • Divergence between market action and fundamentals is disquieting for USD bulls
  • Traders look nervously ahead to next week's US data for rate hike confirmation

Currency and magnifying glass
 Some Tokyo traders wondered if "fat fingers" were to blame for 
the mysterious spike in USDJPY. Image: iStock

By John J Hardy

The USD rally fizzled overnight, in particular on a sharp move in USDJPY that was so mysterious that Bloomberg even posted an article humorously poking at the lack of a clear catalyst and desperate attempts to come up with one. In short, there was no apparent catalyst, so let’s call it “order flow”, scratch our heads and carry on. 

The other head-scratching aspect of USDJPY finding itself back below 110 this morning is that, as we mentioned yesterday, one might have expected the recent rally to pick up further on the sharp recovery in risk appetite combining with the more hawkish Federal Reserve guidance over the last few sessions. So the divergence between the market action and background fundamentals is disquieting for USD bulls here. Next week’s batch of US data should sort us out on whether the USDJPY rally stands or falls.

USDJPY and US 2-year rates
This chart should have the USDJPY bulls a bit worried at the moment, as the recent new highs in US rate expectations (as indicated by the 2-year swap rate in white) combined with resurgent risk appetite have failed to sustain the price action above 110 (USDJPY shown in yellow, price on left axis). Whether this is all a result of hedging flows around that 110 level ahead of month-end that are simply keeping a lid on the pair for now despite strong fundamental support or whether some other drive is afoot should be sorted out next week as we head into a new month and get a look at the next raft of US data.
Chart source: Bloomberg

The G-10 rundown 

USD – no clear picture as the broader USD view looks a bit passive here and, as noted in today’s headline, the USD bulls should be concerned if USDJPY can’t muster a rally in current market circumstances and even more so if US catalysts next week aren’t supportive.

EUR – under the sterling’s thumb as EURGBP has collapsed in recent sessions, and EURUSD should remain under pressure if US rate expectations extend higher next week. The next test for EURUSD is the 1.1100 area.

JPY – we’ve covered the question marks surrounding the yen above - watching the transition into June and the US data next week for next steps.

GBP – the UK referendum polls are becoming a farce overnight as one poll shows a 65/35 vote in favour of staying (Apparently no “undecided” option), while a BMG research poll showed a 1%-point lead for the "Leave" vote and a massive 12% undecided. It would seem that the truly undecideds simply don’t show up at the polls on referendum day. 

CHF – we’re at a loss to explain the action in EURCHF as we watch the 1.1000/25 support next there, but the USDCHF trend is the chief focus and needs to find buyers ahead of 0.9800 to remain compelling in the near term.

AUD – AUDUSD not pushing to new lows, but rallies have been tepid affairs as we await key US data next week.

NZD – weakened on a downbeat Fonterra dairy price forecast as the kiwi gets some overdue negative attention. We continue to watch the 0.6700 area in NZDUSD to trigger further declines.

CAD – market putting perhaps a bit more of a positive spin on the Bank of Canada yesterday than was deserved, but the move below 1.3000 in USDCAD needs to give the bulls pause there, and we may need the 1.2950 area to avoid a capitulation back toward 1.2800 or lower.

SEK – We’re back mid-range in EURSEK – another big risk-on move and it could head lower to test the important 9.12 area, with 9.30 as current resistance.

NOK – supported on oil crossing above the $50/barrel threshold and would expected EURNOK to threaten lower if the oil rally keeps seeing prices marching to new highs, with the critical test in the 9.20/15 area. Also note Norway's second-quarter oil investment survey up this morning.

Upcoming Economic Calendar Highlights (all times GMT)
  • Norway Q2 Oil Investment Survey (0800) 
  • UK Q1 GDP Revision (0830) 
  • US Weekly Initial Jobless Claims (1230) 
  • US Apr. Durable Goods Orders (1230) 
  • US Apr. Pending Home Sales (1400) 
  • US Fed’s Powell (FOMC Voter) to Speak (1615) 
  • Japan Apr. National CPI (2330) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank

26 May
John J Hardy John J Hardy
A note on that Ashcroft poll - a closer read shows that it asks which way the vote is likely to fall, not what how the survey participants would themselves vote: thus, a far lower Remain implication.


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