Article / 23 May 2016 at 7:23 GMT

FX Update: USDJPY dips on G7 summit, may quickly find support

Head of FX Strategy / Saxo Bank
  • G7 provided little to drive JPY weakness
  • US treasury secretary warned against competitive devaluations
  • Japanese officials said they are ready to act.
  • A dive and close below recent  USDJPY 109.50 area would present a tactical setback
  • Bank of Canada meeting mid-week could prompt further action in CAD pairs

Faces on USD and JPY banknotes

The US treasury secretary issued a stern warning against competitive devaluations. Japanese officials said they are ready to act. Image: iStock

By John J Hardy

The G-7 meeting offered little to drive further JPY weakness after rather stark rhetoric from US Treasury Secretary Jack Lew on how the US would view Japanese intervention, as he said that the bar was “pretty high” to declare disorderly currency conditions. But the severity of the rhetoric may be mostly for show, as the US political environment is sensitive on the competitive devaluation front, and Lew’s posturing may be mostly aimed at supporting President Obama’s attempt to get the Trans-Pacific Partnership trade pact enacted to add to his legacy before leaving office. 

Japanese officials, meanwhile, offered fairly pointed warnings that they are ready to act. Japan’s Finance Minister Taro Aso said “I told [US Treasury Secretary Lew] that recent currency moves were one-sided and speculative.” Also somewhat JPY-supportive was the April trade balance report showing Japan’s largest trade surplus in more than five years (if for bad reasons) and the lack of hoped-for news on the delay/scrapping of the planned April 2017 sales tax hike. 

USDJPY rejected

USDJPY was rejected at the lower bound of the Ichimoku cloud after trying to break into the cloud on Friday. This now remains the key resistance, though a resistance that will be declining all week as the cloud boundary falls this week.

A dive and close below the recent 109.50 area, meanwhile, would present a tactical setback for the bullish recovery attempt.

Is the bullish case for USDJPY over?
Source: Saxo Bank

After the greenback’s big surge last week on a remarkable onslaught of hawkish Fed rhetoric, the US event risks this week are second- and third-tier in importance as we await next week’s critical US data (PCE inflation on Tuesday and then the jobs report on Friday) as it is very clear that the Fed wants the data to prompt the June Federal Open Market Committee decision.

Besides the tactical pivot either up or down in USDJPY to start the week and the general USD status this week, note the Bank of Canada meeting mid-week to prompt further action in CAD pairs.

The G10 rundown

USD – as noted above, last week's Hawkish Fed talk provided a critical boost to the USD’s prospects. This week will be about USD bulls ensuring that any consolidation of the move remains relatively shallow in preparation for a bigger follow-up move next week if the US data prove supportive.

EUR – not much in the spotlight lately safe by default, but flash PMIs today could perhaps give a sense of whether the European economy is losing steam after the minor boost from the hectic ECB attempts to boost lending earlier this year.

JPY – this weekend’s developments were JPY-supportive by default as very little happened and now we watch the tactical 109.50/110.25 zone to see which way the near-term action pivots. Somewhat surprised that USDJPY is not already trading higher given the shift in US rate expectations.

GBP – the sterling squeeze eased somewhat, but could have further legs against the euro and possibly the JPY if risk appetite remains robust. GBPUSD, meanwhile, is getting very overpriced relative to the market’s pricing of interest-rate spreads at the moment.

CHF – Friday’s close in EURCHF was the highest weekly closing level since the January 2015 revalauation debacle. This and the focus on Fed hawkishness make USDCHF the interesting trade. Some room for consolidation in the latter pair back into the 0.9800/50 zone, but keeping focus firmly higher on a test of parity and above unless we get notably weaker US data next week.

AUD – The action in AUDUSD remains relatively heavy, with the focus at the moment possibly the 200-day moving average just above 0.7250. We still look for follow-up action to the downside, allowing for a bit more consolidation toward 0.7400 if the USD bulls are forced to wait until next week to get the USD rally back on track.

CAD – the Bank of Canada meeting mid-week is the chief focus for CAD traders, and hard to see the bank supporting rate expectations beyond what it has already achieved lately, so perhaps the dovish potential predominates. Oil prices remain a focus, but mostly on any sharp selloffs, as the recent grind higher in prices hasn’t offered CAD notable support.

NZD – the kiwi is overachieving, mostly as the negative China view sees trader preferring short AUD trades, with AUDNZD perhaps lumped together with these. The NZDUSD chart remains bearish if the action remains below 0.6850-0.6900, though bears will want a follow-up move soon to the downside before the end of the week.

SEK – an evening star formation has appeared on the EURSEK chart, and it's hard to see what drives the pair notably higher unless we get an ugly bout of risk-off sentiment. A few data points of interest from Sweden this week, including unemployment tomorrow, confidence data Thursday and retail sales on Friday.

NOK – last week’s rally in EURNOK spoiled the bears’ party, but the last resistance levels in the longer-term range have yet to give way – most notably the 200-day moving average around 9.40.

Economic data highlights
  • Japan Apr. Adjusted Trade Balance out at ¥427B vs. ¥274B expected and ¥295B in Mar. 
  • Japan May Preliminary Nikkei Manufacturing PMI out at 47.6 vs. 48.2 in Apr. 

Upcoming economic calendar highlights (all times GMT)
  • France Preliminary May PMI surveys (0700) 
  • Germany Preliminary May PMI surveys (0730) 
  • Eurozone Preliminary May PMI surveys (0800) 
  • US Fed’s Bullard (FOMC voter) to Speak (1015) 
  • US Fed’s Williamsn (non-Voter) to Speak (1200) 
  • US Preliminary Markit Manufacturing PMI (1345) 
  • Euro Zone May Consumer Confidence (1400) 
  • US Fed’s Harker (non-Voter) to Speak (2230) 
  • Australia RBA’s Stevens to Speak (0305) 

— Edited by John Acher

John J Hardy is head of FX strategy at Saxo Bank

brian1983 brian1983
Good article
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