- USDJPY hits new 1-month high on talk of sales tax hike delay
- Fed clearly ready to move on rates given the right data mix
- Strong PCE inflation data and earnings would up odds on a hike
USDJPY zips ahead on talk of delay to Japan's sales tax increase. Pic: iStock
By John J Hardy
The currency market is getting off to a running start this week as an aide of prime minister Shinzo Abe said overnight that Japan will postpone the planned sales tax hike as much as two and a half years, sending USDJPY through resistance and on to the next key zone of resistance.
Last week, we noted the difficulty in understanding how USDJPY failed to rally despite both a risk-on tone and the recent sharp rise in Fed rate hike expectations, which encourages a focus on carry trades. Another factor perhaps slowing the USDJPY advance has been the failure of US longer rates to head higher in line with the moves at the short end of the curve (though technically, US treasuries are near a tipping point that could provide further upside support for the US dollar in rate spread terms if US long rate begin to head higher with more conviction).
The US dollar was already moving stronger just ahead of the weekend as Fed chair Janet Yellen was out speaking late Friday, and nodded in approval at the market’s anticipation of an imminent rate hike “The economy is continuing to improve...If that continues and if the labour market continues to improve, and I expect those things to occur…in the coming months, such a move [to hike rates] would be appropriate”.
Note the extreme dependency on the incoming data, but it is clear that the Fed is ready to move on the right data mix. The recent hawkish shift in Fed rhetoric has seen the market moving the odds for a July hike above the 50% mark and this week’s US data is likely to tell us whether a June hike could come into play. The odds of that would shift notably higher if tomorrow’s PCE inflation data comes in more than 0.1% higher than expected and Friday’s average hourly earnings also surprises strongly to the upside, with no notable negative surprises elsewhere (on the argument that the jobs data long ago pointed to rate normalization, but inflation and earnings have lagged, though they are also nearing the Fed’s unavoidable tipping point.). Otherwise, in-line to slightly better than expected data is more likely to see the Fed laying the groundwork at the June meeting for a July hike.
Today’s markets may calm quickly as both the UK and US are closed. The caveat, however, is that many USD pairs are near or at new highs and could trigger stop orders.
USDJPY finally broke from the local congestion and more convincingly into the Ichimoku cloud, where it is now already challenging the top of the cloud. The next area of note from here is the zone above the prior 111.85 area high and towards 115.00.
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The G-10 rundown
– data dependency this week critical – a “cherry on top” for the USD rally would be a notable move higher in longer yields. Significant further room for positioning adjustments in the USD higher versus commodity currencies and the yen, judging from US futures positioning data
. The risk is two way, tactically speaking, for the USD, now that expectations have shifted so sharply higher for the USD’s prospects.
EUR – Looks vulnerable in this environment on carry implications of both risk-on and Fed hawkishness. Next focus is the 1.1000 level in EURUSD if the rather important 1.1100 zone gives way, with a major Fibo even lower around 1.0940.
JPY – weakening on the sales tax hike delay talk and USDJPY already bumping up against the top of the cloud. Attack on next resistance may require solid US data releases at the end of the week.
GBP – How aggressive is the market willing to get on pricing out a Brexit is the critical question here, though the general risk-on tone is also GBP-supportive, mostly perhaps in GBPJPY (note we are at an interesting neckline-like area there) and EURGBP.
CHF – a mystery wrapped in an enigma for now, with EURCHF failing to trend higher despite the . USDCHF near parity is worth noting, however, as sentiment could shift on a move above parity.
AUD – AUDUSD dipped to recent lows near 0.7150, but momentum is coming out here, raising the risk on soft US data that we get caught in a consolidation phase for a spell, but the bears have the upper hand for now.
CAD – CAD a little less willing than the other commodity currencies to yield before USD strength, though the recent highs ahead of 1.3200 somewhat resemble a neckline that provides added drama around the US data releases.
NZD – Somewhat weaker than AUD, but the NZDUSD descent has been a painstaking affair, where the grind lower looks set to continue as long as US data aren’t excessively disappointing, with only temporary backfills even if they are.
SEK – Struggling to pay attention here, though modest pressure lower on EURSEK if risk appetite stays strong, with more tailwinds for the SEK if Swedish data is supportive.
NOK – choppy EURNOK chart of late, with NOK outperforming on risk appetite comeback. The chart looks moderately bearish as long as we remain below 200-day moving average, but we might need a notable move higher in crude oil to engineer a move blow the big 9.15 level.
Upcoming Economic Calendar Highlights (all times GMT)
- Sweden Q1 GDP (0730)
- Norway Apr. Retail Sales (0800)
- Euro Zone May Economic/Industrial/Services Confidence (0900)
- Germany May Preliminary CPI (1200)
- New Zealand Apr. Building Permits (2245)
- Japan Apr. Jobless Rate (2330)
- Japan Apr. Overall Household Spending (2330)
- Japan Apr. Preliminary Industrial Production (2350)
- New Zealand May ANZ Business Confidence/Activity Outlook (0100)
- Australia Apr. Building Approvals (0130)
- Australia Q1 Current Account Balance (0130)
– Edited by Clare MacCarthy
John J Hardy is head of FX strategy at Saxo Bank