Will the Short Yen Trade turn into the Long Gold Trade?

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The U.S. dollar is trading lower against the euro, British pound and the Japanese Yen on the back of weaker than expected first quarter GDP numbers. Growth in the first 3 months of the year accelerated to 2.5% from 0.4% in Q4 but economists were looking for GDP to reach 3%. On a day when USD/JPY was already pressured by weaker Japanese CPI and division within the Bank of Japan, disappointing U.S. data only compounded the pain for USD/JPY. With no catalysts to support USD/JPY in the very near term, the currency pair is poised for a test of 98 and if this level is broken 96 will become support.

U.S. first quarter GDP growth really wasn’t all that bad. Personal consumption jumped 3.2%, to its strongest level since in Q4 2010 while private investment rose 12.3% on higher residential investment. Exports and imports also increased but fixed investments plunged. The Federal Reserve who is meeting next week will be relieved to see a pickup in consumption but nonetheless the disappointment, which was the largest since 2011 will still give FX traders another reason to sell USD/JPY.

All of the Japanese Yen crosses are on the move today with USD/JPY, EUR/JPY, CAD/JPY and AUD/JPY down more than 1%. The Bank of Japan did not announce any new monetary easing measures last night, which wasn’t a surprise but investors were still disappointed because policymakers can’t agree on whether 2% inflation can be achieved in 2 years. According to their median forecasts, CPI is expected to hit 1.9% in March 2016, which are 3 and not 2 years from now. Going into last night’s event risks, we said that the sooner the BoJ expects to reach their goal, the more positive it would be for USD/JPY. Unfortunately the BoJ now expects this target to be reached at the end of 3 years, which is longer than their initial pledge.

In other words they just started easing aggressively and they have already resigned themselves to failure. The range of forecasts are also huge with some members looking for CPI to be at 0.8% and others at 2.3% which implies that there is a huge amount of division within the central bank.

Will the Short Yen Trade turn into the Long Gold Trade?

So with BoJ officials skeptical about their own ability to boost inflation to 2%, it is no surprise to see USD/JPY under pressure. For the time being this should be a near term top in USD/JPY. We have seen zero evidence of Japanese investors raising their foreign bond exposure and until all of the investment plans by Japanese lifers to diversify are put into action (which will happen), there’s no reason for FX traders to jump back into the short Yen trade. Hopefully this won’t turn into the Gold trade where everyone bought gold on the expectation that QE would drive up inflation only to be stopped out brutally – but we wouldn’t be surprised if it did. If Japanese stocks continue to perform well, Japanese investors could keep their money in domestic equities. Yet there is hope for USD/JPY next week – if U.S. yields rise on optimism from the Fed or stronger non-farm payrolls numbers, it could reverse the slide but unless we have a blowout NFP number (250K or more), USD/JPY may not be able to break 100. As we have mentioned in the past, USD/JPY 100 is contingent on rising U.S. yields, Japanese purchases of foreign bonds and a continuation of the rally in Nikkei.

Kathy Lien
Managing Director

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