5 Reasons Why USD/JPY Hit 107

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5 Reasons Why USD/JPY Hit 107

Daily FX Market Roundup 03.28.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

The U.S. dollar traded higher against all major currencies today but USD/JPY was hands down the best performer. It is easy to explain the pair’s outperformance when we can identify at least 5 reasons for the rally:

1. Kim Jong-un visits China – Last night, we learned that Kim Jong-un chose to visit China for his first ever international trip as North Korea’s leader. This unannounced visit is monumental for a number of reasons. First, it highlights China’s importance to North Korea and their desire to seek approval and guidance in upcoming meetings with U.S. and South Korean leaders. According to China, NK is committed to denuclearization, which is essential to reducing tensions in the region and eliminating the risk of U.S. military action. President Trump was quick to applaud the visit by tweeting that he looks forward to their meeting, which will most likely be in May. Ongoing progress with North Korea is positive for the markets because it eases one of last year’s greatest geopolitical risks and has played a big role in the recovery of U.S. stocks and USD/JPY.

2. Stocks Halt Declines – Thanks to the NK news, U.S. stock did not extend its sell-off after Tuesday’s sharp decline despite weakness in Asian equities. USD/JPY was able to break above 106 at the start of the NY session because traders saw that futures pointed to a positive open. The FTSE and CAC, which had initially been down also turned positive for the day.

3. U.S. Q1 GDP Revision – While USD/JPY broke above 106 before this morning’s U.S. economic reports, stronger data secured the pair’s rally. First quarter U.S. GDP growth was revised up to 2.9% from 2.5% on the back of stronger spending and a smaller inventory drag. This increase along with the rise in pending home sales was better than expected, allowing USD/JPY to break 106.50 and eventually test 107.

4. Technical Break Above 106.07 – USD/JPY’s rally gained momentum when the pair broke above the 20-day SMA and March 22 high near 106.07. This triggered a series of stops that took USD/JPY above 106.30 quickly and then after the London close, the pair extended its gains to 107.00

5. End of Month & Quarter Flows – Last but certainly not least, the first quarter was a very difficult one for USD/JPY. The pair dropped from a high of 113.38 to a low of 104.57. Many investors profited from this move and as the quarter draws to a close, profit taking flows also contributed to the recovery in USD/JPY. Japan’s fiscal year ends on Friday and it appears that most of the repatriation has been completed.

Looking ahead tomorrow is the last full day of trade before the Easter holidays. With the exception of Japan and China, all of the major markets are closed on Friday. U.S. and Canadian markets are back online Monday but Europe, Australia and New Zealand will remain closed until Tuesday. Aside from the holidays, it is also the last day of the month and quarter, so we could see unusually erratic trading. A flurry of U.S. data is scheduled for release, including personal income, personal spending and Chicago PMI and the risk is to the downside for most of these reports.

Euro and sterling sold off against the U.S. dollar for the second day in row.
Stronger German consumer confidence failed to help the single currency hold 1.24 with late day selling driving the pair below the 20 and 50-day SMA at 1.2340. If the dollar continues to rise, the next stop could be 1.2250. Sterling on the other hand was pressured by a significantly weaker than expected CBI Distributive Sales survey. This report, which measures consumer demand, fell for the first time in 5 months due to inclement weather. However the Bank of England also warned about “evidence of financial distress in retail and leisure.” German labor market and inflation data are scheduled for release on Thursday along with the U.K.’s current account balance, first quarter GDP revision and mortgage approvals.

All 3 of the commodity currencies traded lower against the greenback with the New Zealand dollar leading the slide.
Although activity improved in March according to ANZ, business confidence slipped slightly. This report contributed to NZD’s weakness but the selling really accelerated when the U.S. dollar started to rise, triggering stops once the pair fell below the 20-day SMA near .7250. The Canadian dollar was fairly resilient in the face of sharply lower oil prices and reports of significant gaps between the U.S. and Canada from Canadian NAFTA negotiator Verheul. Hope for a stronger Canadian GDP report tomorrow is the only explanation for the loonie’s refusal to fall as stronger retail sales and trade activity point to a faster growth in the month of January. AUD/USD hit a fresh 3 month low but its losses were more modest than NZD/USD allowing AUD/NZD to halt a 4 day slide and trade back above 1.06.

Kathy Lien
Managing Director

One thought on “5 Reasons Why USD/JPY Hit 107”

  1. I would be interesting if BK would comment on the developments:
    • Libor-OIS soars higher, not seen since the subprime debt crisis.
    • BIS has recently warned that banks in especially Canada, China and Hong Kong run high risks of failure! Even higher risks than Italian, Greek and Spanish banks. I guess EU will bail them out despite Germany’s foul cries.
    • IMF has recently ordered the European countries, not USA(!), to send 0,35% of their yearly GDP to a joint crisis fund.
    • EU and ECB recently implemented rules on bail-in of banks, as opposed to tax-payers bail-out, and pushed stricter rules on banks’ bad debts into the future. Of course the creditors of the banks are the depositors, which is not big enough to know when to withdraw in time. It means tax-payers, being depositors banks and owners of bonds via their pension funds, will pick up the bill in the end anyway, as always.
    • ECB owns +40% of Eurozone debt with near or under zero % interest rate.
    • EU has over 100% in public debt ratio to GDP, while USA has about 70%.
    • BoJ owns 40% of Japan’s debt.
    • Pension funds are suffering due to demography with baby-boomers retiring and returns of bonds at record lows.
    • FED is tightening with ending its bond buying programme and also raising rates.
    • US big corporations repatriate billions, if not trillions, back from foreign banks to US banks.

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