Article / 29 January 2013 at 9:39 GMT

JPY cross consolidation ahead of FOMC event risk

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

USDJPY backed off the 91.00 level in recognition of tomorrow’s FOMC event risk and as US 10-year yields pulled back after pushing to the 2.00% level yesterday. US Consumer Confidence up later today.

JPY
It’s rather interesting that the massive weakening in the JPY has failed to nudge Japan’s small business confidence more than a couple of points from its November levels. This is perhaps because it is the large exporters that stand to gain the most from currency developments, but still... USDJPY failed to maintain the 91.00 level yesterday and overnight despite the move to nudge the 2.00% level in the US 10-yr. yield, the highest level since last April (though bonds firmed in late trading yesterday). It makes sense for the JPY crosses to pull back a tad here from their march higher as we have significant event risks in the pipeline in the from of tomorrow’s FOMC meeting and the US employment report on Friday. That 2.00% level in bonds is an important one for the future of USDJPY, which could yet drift higher if bonds continue to crumblepost-FOMC, while the resistance may get firm up if bonds stage a rally here.

FOMC – new voters, new dovish/hawkish mix
Four of the voting members of the FOMC will change as the various regional Fed presidents are rotated. While the vocal Lacker will be rotated out, he will be replaced with the approximately equally hawkish Bullard of the St. Louis Fed and (according to this post by ZeroHedge from a couple of weeks ago that reprints a helpful overview graphic from SocGen) a slightly hawkish George of the Kansas City Fed. But while this may mean we have a chance at two dissenting votes rather than just one, we also have the return of two ultra-doves, Evans of the Chicago Fed and Rosengren of the Boston Fed. Evans is of the pro-NGDPLT persuasion. The most dovish scenario that some are imagining is one in which Bernanke steps down and makes way for Obama to appoint the very dovish Yellen who could sway the FOMC to nominal GDP level targeting. But that’s not what the futures market is predicting here – if we look out the curve at the likes of late 2014 EuroDollar STIRs, we’re actually seeing the market predicting an earlier tightening than the Fed itself has said it is likely to take. That contract is near a five month low and has come off a solid 14 ticks from recent highs. It will be up to tomorrow’s new FOMC statement to either extend that move or deny it.

All in all, tomorrow’s FOMC meeting is as important as ever for establishing the latest mood from the Fed and this will have a bearing on the US dollar depending on where it lies on the dovish/hawkish scale. In this case, dovish is business as usual with virtually no changes to the statement (or minor changes that downgrade the Fed’s description of some aspect of economic conditions) while hawkish is any mention or hint of a discussion that the concept of Fed tightening is a concept that still exists.

But it is also interesting to note the US dollar’s strength in general of late despite very complacent markets in general and the 1500 level being taken out in the S&P 500. More on this subject in future posts, but the one-sentence version is likely that the US is farther along the curve in the deleveraging process than much of the rest of the world, and therefore there is “more upside” potential for the US economy, or perhaps more likely – “less downside” than elsewhere. Consider an economy like Canada’s or Sweden’s, for example, where the credit bubble is just now maxing out – and where a painful deleveraging cycle eventually awaits.

Later today, I’ll be watching the US Consumer Confidence survey with interest. December’s data saw a sharp drop back into the old range – is confidence tailing off or was this a one-off triggered by all of the uncertainty of the fiscal-cliff talk in the media? The weekly Bloomberg consumer comfort surveys don’t show any improvement since the first of the year – quite the contrary, and let’s remember that the fiscal/policy uncertainty most certainly still weighs.

Stay careful out there.

Economic Data Highlights

  • New Zealand Dec. Trade Balance out at +486M vs. -105M expected and -590M in Nov.
  • Australia Dec. NAB Business Conditions out at -4 vs. -6 in Nov.
  • Australia Dec. NAB Business Confidence out at +3 vs. -9 in Nov.
  • Japan Jan. Small Business Confidence out at 44.3 vs. 43.8 in Dec.
  • Germany Feb. GfK Consumer Confidence out at 5.8 vs. 5.7 expected and 5.6 in Jan.
  • Spain Dec. Adjusted Retail Sales out at -10.7% YoY vs. -8.9% expected and -7.8% in Nov.

Upcoming Economic Calendar Highlights (all times GMT)

  • US Nov. S&P/CaseShiller Home Price Index (1400)
  • US Jan. Consumer Confidence (1500)
  • US Weekly API Crude Oil and Product Inventories (2130)
  • New Zealand Dec. Building Permits (2145)
  • Japan Dec. Retail Trade (2350)

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