Yields on core European bonds went for a slide yesterday as prices rose in response to the ECB's decision to leave its QE programme unchanged – for now at least. Elsewhere, the USD continues to make gains on its peers.
Article / 16 June 2016 at 8:00 GMT

FX Update: USDJPY hits new lows post-FOMC/BoJ

Head of FX Strategy / Saxo Bank
  • FOMC meeting, Bank of Japan passivity helps send USDJPY below 104.0
  • Next level for USDJPY could be 100.75
  • BoJ/government needs to decide when is the best moment for intervention
  • Fed chair Yellen raises prospect for helicopter-money route for US

Helicopter money is already a de facto reality in Japan but might the US also be contemplating such a move after Fed chair Janet Yellen hinted at such a possibility? Photo: iStock

By John J Hardy

The market had adjusted its expectations for yesterday’s Federal Open Market Committee  statement sharply to the dovish side after the weak May payrolls number, but the Federal Reserve managed to engineer some further USD weakness after the negative adjustment to the language on employment in the policy statement and more notably, the significantly lowered guidance in the longer run Fed expectations.

Why the Fed bothers to make such a significant adjustment based on a single bad payroll is a question worth asking, and the dot plot has become a running embarrassment as the Fed’s lack of a trusty crystal ball and inability to maintain a consistent message for even two meetings in a row continue to erode its credibility.

The dovish message failed even to shore up risk appetite as the spin is perhaps that this is a clueless Fed rather than a supportive one. 

One interesting side note, during the Q&A a journalist asked Fed chair Janet Yellen about the efficacy of helicopter money and she generally outlined that it was justifiable for a normally independent central bank to abandon its independence and coordinate action with the government in the event of extreme circumstances.

That was very interesting, though we’re very far from the US economy being in a state that requires a helicopter drop and Yellen’s comments were couched with all kinds of caveats and hypotheticals.

The latter is not the case for Japan, where the helicopter money is already a de facto reality as the BoJ continues to more than cover the government’s still sizable deficits. But more helicopter money is the BoJ/Shinzo Abe government’s inevitable next step, the question only one of timing.

And timing is shortening with every fresh plunge in the USDJPY and other JPY crosses like the one seen overnight after the BoJ wisely passed on doing anything at this meeting. Wisely, because we need to be in a less heated environment without the Brexit issue hanging over the market to see the maximum impact from any new policy initiative.

USDJPY to new cycle lows

USDJPY and other JPY crosses are free of recent support and plunging to new lows for the cycle. This 105.50 area in USDJPY is that last notable one ahead of the 100.40 area Fibo retracement and the old lows from early/mid-2014 in the 100.75 area.

One has to imagine that the BoJ will be smoothing price action at some point around these levels as it gears up, likely in cahoots with Abe, to launch a fiscal/helicopter money stimulus at one of its coming meetings.

The Bank of Japan passed up the opportunity to intervene on the strength of the yen
Source: SaxoTraderGO
The G-10 rundown

USD – the impact from the FOMC is likely to prove rather fleeting as long as market is in risk-off mode, though it could remain weak versus the JPY and CHF into next week’s UK referendum on safe-haven seeking.

EUR – pulling higher against the USD after FOMC, but it is hard to see much safe-haven credibility with the UK referendum vote looming.

JPY – last major area structurally looks like 100.75–ish, the old lows from early 2014, but would BoJ let the freefall continue without some kind of smoothing at minimum?

GBP – sterling is getting the short end of the stick amid risk aversion, a good portion of which is reflexive to the Brexit fears.

CHF – The Swiss National Bank is up this morning, with the tough task of saying something relevant when the outcome of the UK referendum is unknown. It will likely talk up resolve and little else, hoping that things will sort themselves out if UK votes to Remain.

AUD – Bearish rejection of the rally attempt overnight as it makes no sense for AUD to follow JPY higher in this environment. Downside swing area looks like to be approximately at 0.7275.

CAD – quite weak as oil corrected further and a lack of impact from FOMC on USDCAD suggests pressure to trade higher in this environment. We are watching if we can clear and maintain 1.3000 as a firmer bullish signal.

NZD – Another boost for the kiwi’s fortunes as GDP was stronger overnight and the currency continues to miraculously sidestep the widespread risk aversion. The perfect wave may crest soon for the currency, but we need technical signs for this – starting with a close well below 0.7000 in NZDUSD.

SEK – Risk aversion negative for SEK and EURSEK pushing on key resistance soon in 9.38 area.

NOK – EURNOK is pushing up on the key 9.40 range highs and the 200-day moving average and it is hard to see what keeps it down if risk aversion intensifies and/or oil prices plunge another dollar or more.

Upcoming economic calendar highlights (all times GMT)

  • Switzerland Swiss National Bank Announcement (0730) 
  • Switzerland SNB’s Jordan to Speak after announcement (0800) 
  • UK May Retail Sales (0830) 
  • UK Bank of England Announcement (1100) 
  • US Q1 Current Account Balance (1230) 
  • US Weekly Initial Jobless Claims (1230) 
  • US May CPI (1230) 
  • US Jun. NAHB Housing Market Index (1400) 
  • UK BoE’s Carney, Chancellor Osbourne to Speak (2000) 

— Edited by Martin O'Rourke

John J Hardy is head of forex strategy at Saxo Bank


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