USDJPY Gets Dumped

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Market Drivers January 05, 2017
USDJPY falls through 116.00
Nikkei -0.37% Dax -.10%
Oil $53/bbl
Gold $1175/oz.

Europe and Asia:
CNY Caixin Services PMI 53.4 vs. 53.3
GBP UK PMI Services

North America:
USD ADP 08:15
USD ISM Non-Manufacturing 10:00

USDJPY was dumped hard in Asian and early European session today dropping nearly 2 big figures off the session highs as profit taking post FOMC minutes and strengthening in the USDCNY rates helped fuel the selloff.

Asian traders were much less impressed with the FOMC minutes which confirmed the Fed’s tightening path but left plenty of room open to interpretation as to the scope of the rate hike cycle. Although consensus view is looking for the Fed to hike 3 times in 2017, the FOMC left open the possibility that the Fed may tighten only twice.

We’ve noted yesterday that USD/JPY has lost much of its forward momentum, failing to take out the 119.00 for the past two weeks running and today’s price action confirms that the pair was ripe for profit taking. With both ADP and ISM Non-Manufacturing on the North American docket today the sell-off could extend to 115.00 figure if the data disappoints.

Meanwhile elsewhere the offshore and onshore CNY markets saw a massive liquidity squeeze ahead of the Chinese New Year that starts at the end of month. Demand for cash pushed the implied overnight offshore lending rates to 50% helping to push the yuan higher by 2.1% – a record gain – and its best showing in 2 months as the exchange rate fell to 6.8072.

For a while dollar weakness was persistent across the board with EUR/USD and commodity currencies also seeing strong gains into the Asian close. However, European trade unwound much of the decline in the greenback, with pound especially weak against the greenback as the pair slipped below the 1,2300 mark.

UK PMI Services came in at 56.2 versus 54.7 eyed which helped boost cable above the 1.2300 level in post news trade. New orders surged to 58.1 from 54.9 indicating that UK economy continues to perform well despite expectations of a Brexit driven slowdown. The PMI suggest that growth in Q4 will be 0.5% – its best pce in 17 months. It’s difficult to tell if the current buoyant rate of growth is simply the function of easy credit from BoE and massive devaluation in the currency or if it does indeed show that UK economy may be more resilient than experts thought. There is still no way to predict the extent of the exogenous shock that would result from a hard Brexit, but in the meantime the positive data from all three UK PMI’s may provide a modicum of support for the currency and could help push cable back towards 1.2400 while sending EURGBP back below the .8500 figure.

In North America however, the focus will quickly shift to US data with market anticipating that ADP will come in at 170K versus 216K and ISM projected to dip slightly to 56.6 from 57.2. Any small variance from consensus is unlikely to have much impact on trade. An upside surprise could reverse much of the overnight selloff and squeeze USD shorts once again back to the 118.00 level. But a miss in ADP or in the employment component of ISM could trigger a much sharper correction in USDJPY as US yields will likely retreat on fears that Fed’s tightening cycle will once again be postponed.

Boris Schlossberg
Managing Director

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