Will Japan GDP Drive USD/JPY to 110?

Daily FX Market Roundup 05.17.16

Over the past 6 trading days the U.S. dollar has been quietly consolidating its gains versus the Japanese Yen, waiting for its next big catalyst. Although we have seen a broad based recovery in the U.S. dollar, USD/JPY’s strength can be partially attributed to concerns about Japan’s economy. Tomorrow’s first quarter GDP report is expected to show Japan narrowly escaping recession but the fear is that GDP growth may have stagnated and/or remained negative between January and March. Everyone has been waiting for the Bank of Japan to ease but they put off the decision and passed the baton to Prime Minister Abe. So the general belief is that if growth falls short of expectations, the BoJ will need to ease in June or July. Japanese data does not normal command this much attention but with USD/JPY consolidating within a 145 pip range for the past 6 days and the market itching for some central bank action, a weak number could send the pair soaring to 110. However the risk is to the upside for Japan’s GDP report. The forecasts are low and we saw improvements in the trade balance and retail sales in the first 3 months of the year. A healthier GDP report would be positive for the Yen but unlike a weak release, a strong number may only drive USD/JPY to the bottom of its recent range (108.23) and not much more beyond it.

Tomorrow’s FOMC minutes will also affect USD/JPY.
Better than expected U.S. data helped the dollar hold onto its recent gains but they failed to take the greenback to fresh highs. The sharp increase in housing starts, stronger rise in consumer prices and jump in industrial production tell a similar story as Friday’s retail sales report –one of continued recovery in the U.S. economy. The last time the Fed met was in late April and even though U.S. policymakers expressed less concern about global troubles, the dollar peaked as investors realize that there was nothing in the statement to suggest they would raise interest rates in June. The overall tone of the FOMC statement was subdued with the Fed noting that inflation remains low and inflation expectations were little changed. While they liked how the labor market had been performing, they no longer saw economic activity expanding at a moderate pace. The balance of risks statement was also missing from the report. Tomorrow’s FOMC minutes is expected to confirm the division in views within the central bank and validate the market’s expectations for steady rates next month.

The euro ended the North American trading session unchanged against the greenback. EUR/USD is hovering near its monthly low which is either a great place to buy the currency pair or a precursor to a deeper correction. We believe that its the former as the pair holds its 50-day SMA support. The latest economic report out of the Eurozone was strong with the region’s trade surplus growing to 22.3B from 20.6B. Economists were looking for deterioration but instead there was improvement. Eurozone consumer prices are scheduled for release tomorrow but no revisions are expected. Consumer prices fell 0.2% year over year in April, keeping the door open to additional ECB easing.

Sterling’s complete disregard for deteriorating data continues to astound us.
The British pound traded higher versus the euro and U.S. dollar despite a surprise slowdown in consumer price growth. CPI rose only 0.1% in the month of April, which was significantly weaker than the market’s 0.3% forecast driving the year over year rate down to 0.3%. While the Bank of England may be concerned about rising price pressures this data doesn’t confirm it and perhaps that’s why there was greater emphasis on slower growth than stronger inflation in their Quarterly Report. Between the miss in CPI and the slowdown in all three PMIs, sterling should be trading much lower. However nothing seems to matter more than politics for the pound. A recent poll showed that the Remain vote was pulling ahead but the account is inconsistent because there were more supporters for Remain by the telephone poll, whereas more online participants favored Leave. U.K. employment numbers are scheduled for release tomorrow and we are looking for another soft report because according to the PMIs, job growth was at its weakest level since 2013 for both the service and manufacturing sectors.

The Australian and New Zealand dollars saw strong gains today.
According to last night’s RBA minutes, the decision to cut interest rates was a close one which suggests that there will be very little desire to ease monetary policy again in June or July. Australian and Chinese data has been terrible but this sentiment could carve out a near term bottom in AUD but if the currency rises to 75 cents, it would be an attractive sell. The New Zealand dollar ticked up on the back of higher dairy prices. New Zealand’s economy is certainly faring better than Australia validating our view that AUD/NZD should be trading lower.

Despite another day of gains in oil, USD/CAD ended the day unchanged. With the psychologically significant $50 level in reach, traders are skeptical of how much more oil will rise and have been reluctant to sell USD/CAD. Also the 2 year U.S.-Canadian yield spread hit 1 month highs, signaling that it may be time for a renewed rally in pair. Data has been strong with existing home sales rising in April and manufacturing sales falling less than anticipated but the real test for the loonie will be Friday’s retail sales and CPI reports.

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