What is USD/JPY Waiting for?

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The U.S. dollar is trading higher against most of the major currencies this morning despite weaker than expected U.S. data. While it has been a relatively quiet morning for the euro, other major currencies such as the British pound and New Zealand dollars have fallen sharply as country specific factors such as dovish BoE minutes and cautionary comments about an overvalued NZD from the RBNZ drive currency flows.

There was a handful of U.S. economic reports released this morning but as we have written recently, steady monetary policy in the U.S. limits the impact of U.S. data on the dollar. Housing starts dropped 8.5% in the month of January, 2 times lower than expected but the disappointment was offset slightly by the upward revision in December. Building permits on the other hand beat expectations but the 1.8% increase versus the 1.2% forecast hardly made up for the difference. U.S. housing market numbers tend to be volatile and while this month’s data shows a bump in the road for the sector’s recovery, the housing market is still stabilizing which is why USD/JPY shrugged off the news. Producer prices increased in the month of January by 0.2%, up from a downwardly revised 0.3%. Yet inflationary pressures are falling short of expectations and at an annualized pace of growth of 1.4%, it shows that contrary to everyone’s fears, easy monetary policy has not increased price pressures. The minutes from last month’s FOMC meeting will be released later this afternoon and should have a more significant impact on the dollar than this morning’s report.

Meanwhile USD/JPY continues to consolidate, waiting for its next catalyst, which will come from the nomination for Bank of Japan Governor. The announcement can come any day now but is likely to occur right either right before or after Prime Minister Abe returns from his visit to the U.S. early next week. The short term reaction in USD/JPY will depend on his choice of BoJ Governor with Iwata being the most dovish, Muto being the least and Kuroda in the middle. However, at the end of the day we believe that regardless of which man Abe chooses, the new head of Bank of Japan will come out quickly and reaffirm his plans to follow through with reaching the government’s 2% inflation forecast which will require an aggressive amount of easing and drive the Yen lower once again.

Kathy Lien
Managing Director

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