USD/JPY Leads Losses, Is it a Bargain?

Posted on

Daily FX Market Roundup 03-21-13

USD/JPY Leads Losses, Is it a Bargain?
EUR: Cyprus a Risk but Focus Shifts to PMIs
GBP: Soars on News Consumers Returned to the Shops
AUD: Breaks Out of Consolidation on Hot Chinese Data
CAD: Retail Sales Expected to Rebound
AUD: Watch for Chinese Data
JPY Soars on Careful Comments from Kuroda

USD/JPY Leads Losses, Is it a Bargain?

The U.S. dollar traded higher against all of the major currencies except for the Japanese Yen. USD/JPY led the losses in the FX market, falling more than 1% over the past 24 hours. This weakness combined with the weakness of the EUR made EUR/JPY, which is down 1.5% the worst performing major currency pair. The decline can be attributed to a number of reasons but U.S. data is not one of them. Most of today’s economic reports beat expectations with weekly jobless claims in the U.S. coming in at 336k compared to 334k the previous week. These extremely low levels have pushed the less volatile 4 week moving average to its lowest level in more than 5 years. The Philadelphia Fed survey also rose back to positive territory (2.0 in March versus -12.5 in February) while leading indicators rose 0.5%. The only disappointment was in existing home sales, which grew less than expected but the upward revision to the prior month’s report offset some of the pain. These numbers validate Bernanke’s lack of concern about negative risks posed by the sequester or Cyprus.

Instead, EUR/JPY selling, unimpressive comments from new Bank of Japan Governor Kuroda and lower U.S. bond yields all contributed to the sell-off in USD/JPY. The following chart shows how much U.S. yields have plunged and it is for this reason that we believe USD/JPY is under pressure. With this in mind, many traders are wondering if current levels represent a bargain for USD/JPY. From a Yen perspective, the prospect of additional Quantitative Easing in April should limit losses in USD/JPY to its support level of 93 in our opinion but what really matters is the outlook for U.S. yields. Positive U.S. economic data and Bernanke’s optimism should drive yields higher but that may be difficult until the crisis in Cyprus is resolved. Investors are buying bonds across the globe in fear that the problems in Cyprus could lead to further weakness in equities and currencies. Nonetheless we still see USD/JPY recapturing its highs but the real test will be in 2 weeks when the new Bank of Japan Governor holds his first meeting. If he fails to ease, we could see more profit taking.

EUR: Cyprus a Risk but Focus Shifts to PMIs

With European data disappointing and U.S. economic data surprising to the upside investors have returned to selling euros. Not only has tail risk in the Eurozone returned with the ECB threatening to pull support from Cyprus if an agreement is not reached by Monday but the outlook for growth has taken a turn for the worse, compounding the euro’s problems. Eurozone manufacturing and service sector activity contracted at a faster pace in the month of March with the Eurozone PMI Composite index dropping to 46.5 from 47.9. While this is not the lowest reading that we have seen in the past 6 months, the cracks in Germany are reappearing. The Eurozone’s largest economy is no longer able to provide umbrella support for the rest of the region and is now weakening alongside France, Italy and Spain. Tomorrow’s German IFO report will most likely tell the same story of weakness in the Eurozone economy. The deteriorating growth outlook and risks posed by Cyprus and Italy (lets not forget about the unresolved elections) makes the euro less attractive than the dollar and should continue to add pressure on the currency.

GBP: Soars on News Consumers Returned to the Shops

While stronger retail sales numbers drove the British pound sharply higher against the euro and U.S. dollar, 1.52 is still capping gains for the GBP/USD. Consumer spending rose 2.1%, its strongest pace in 11 months, soundly beating the market’s 0.4% forecast. After 4 months of flat or negative sales, we really needed to see a good number to reduce the chances of a triple dip recession. The data for the month of February suggests that consumers are coming back but some of that was due to improved weather. The U.K. government is doing what it can to encourage spending according to the 2013 Budget with Chancellor Osborne looking to spur spending by eliminating plans to raise the gasoline tax and by reducing the tax on beer. They also plan to increase the tax-free earnings allowance. If this improvement can be sustained, the risk of a triple dip recession will recede, leaving the Bank of England with the flexibility to focus on the upside risks to inflation. The Budget was also very good with the U.K. reporting its smallest budget deficit in 5 years. If the GBP/USD manages to break above 1.52, the shift in economic data and the less dovish comments from the Bank of England could support a stronger rally towards 1.54, the currency pair’s next resistance level.

AUD: Breaks Out of Consolidation on Hot Chinese Data

The Canadian, Australian and New Zealand dollars soared on the back of better than expected economic data. Retail sales in Canada rose 1.0% in the month of January after falling 2.3% the previous month. While the increase in spending can be largely attributed to a recovery in auto sales, spending on items excluding vehicles also rose 0.5%. Since these numbers were only slightly better than expected, the impact on the CAD was nominal because one month of improvements is not enough to reverse the Bank of Canada’s recent shift towards more cautiousness. The Australian and New Zealand dollars on the other hand broke out of recent consolidations on the heels of stronger Chinese PMI numbers and New Zealand GDP figures. For the RBA, stronger growth in China reduces the need for additional easing. Fourth quarter GDP growth in New Zealand was the strongest in 3 years so while the RBNZ may be worried about the strength of its currency, they also have very little reason to ease monetary policy. While the earthquake in Christchurch happened 2 years ago, rebuilding continues to contribute positively to New Zealand’s economy. Australian leading indicators are due for release this evening along with New Zealand job ads. We don’t expect these second tier economic reports to threaten the latest uptrend in the AUD and NZD.

JPY Soars on Careful Comments from Kuroda

The best performing currency today was the Japanese Yen, which traded more than 1% higher against the U.S. dollar, euro and Swiss Franc. Last night’s trade numbers were better than expected with the trade deficit shrinking to Y777.5 billion from Y1630.9 billion. Unfortunately Japan is still running a deficit with shipments to China falling 15.8% during the Lunar New Year holiday. So far we have seen only limited benefit from Yen weakness. Comments from Japan’s new Bank of Japan Governor Kuroda also failed to help to USD/JPY. Instead of providing more clarity on monetary policy during his inaugural press conference, Kuroda nodded vigorously, leaving all options open and saying simply that “We have to implement more effective monetary easing, but we’ll think about what at the policy board meeting.” While he said it is not impossible for the Bank of Japan to hold an emergency meeting before the April 4th meeting, he sounded unconvincing. Overall Japan’s new BoJ Governor went out of his way to avoid dropping any hints about future monetary policy suggesting that he may not be overly eager to ease at their first monetary policy meeting, which is only 2 weeks away. He may want to take his time to truly understand their monetary policy options before taking action. Also, the decision is not his alone. He will need to meet with the rest of the committee and the real test will be on April 4th, when the BoJ makes his first monetary polity meeting.

Kathy Lien
Managing Director

Leave a Reply

Your email address will not be published. Required fields are marked *