Will Hotter PCE Push USD/JPY to 114.00?

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Market Drivers Mar. 28, 2016

Comm dolls firm as oil rises
CNY markets close -0.7%
Nikkei 0.77% Dax closed
Oil $39/bbl
Gold $1217/oz.

Europe and Asia:
No data

North America:
USD Trade Balance 8:30
USD PI/PS 08:30
USD PCE deflator 8:30
USD Pending Homes 08:30

With most of the Anglo Saxon centers in Asia and all of Europe closed for Easter Monday it’s been a very quiet session of trade in FX with most of the major currencies just treading water ahead of the North American open.

A small bid in oil with crude moving back towards the $40/bbl handle helped boost commodity dollars with USD/CAD picking up 40 pips on the session while AUD/USD rose to a high of 7540 but stalled ahead of the 7550 level.

USD/JPY also continued to move higher posting its seventh gain in a row as the pair broke through the 113.50 zone ahead of North American open. US yields on the benchmark 10 year bond were back to 1.90% and that helped to push the pair higher as the European session wore on.

With North American markets open for business the pace of trading is likely to pick when New York comes on line and traders will focus on key US data to be released today. Aside from the Trade Balance report and the numbers on Personal Income and spending, currency traders will key off the PCE price deflator which is the Fed’s favored measure of inflation.

The core PCE data is expected to print slightly cooler this month at 0.2% versus 0.3% the month prior, but if it surprises to the upside it could spur a flurry of trading in both the fixed income and currency markets as traders begin to price in the higher possibility of a rate hike with the coming months. A hotter reading could push the benchmark 10 year through the psychologically key 2.0% level which in turn could propel USD/JPY towards the 114.00 mark as the day progresses.

The central question in the market right now is whether the Fed will reconsider its dovish stance that it assumed in the last FOMC meeting if the US data continues to surprise to the upside on both the inflation and growth fronts. Today’s PCE data could set the tone for FX trade if it shows that inflationary pressures are starting to heat up.

Boris Schlossberg
Managing Director

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