The U.S. dollar is trading higher against all of the major currencies this morning and the lack of U.S. data means some currencies are experiencing deep sell-offs and others shallow declines depending on how their own economic reports surprised overnight. The EUR for example is down only marginally against the dollar because the Eurozone’s PMI services index was revised higher in April but the AUD is down sharply after retail sales dropped 0.4% and HSBC reported slower Chinese service sector activity.

The movements of these currencies are interesting but many traders have their eye on USD/JPY, which is inching its way towards 100. Since the Bank of Japan eased monetary policy at the beginning of April, investors and economists around the world have been looking for USD/JPY to break 100. However the hope began to fade as USD/JPY struggled below 100 for the next month but now the enthusiasm has returned and investors are hoping that this key level will be broken sometime this week.

Potential Catalysts for 100 USD/JPY

While we believe that a break of 100 for USD/JPY is inevitable and given the proximity of this level a test is possible but we are skeptical about whether a sustained break can occur this week. There’s very little U.S. economic data on the calendar and 80% of S&P 500 companies have already reported their earnings. The only potential catalyst from the U.S. side would be the speeches from Federal Reserve officials (Bernanke included) but most of them are not scheduled until Friday. Therefore if USD/JPY were to break 100, it would have to be caused by Japanese data. The 2 main event risks for the Yen this week are the country’s current account numbers on Thursday and the Ministry of Finance’s weekly flow of funds report. In order for USD/JPY to rally, we need to see Japanese investors finally diversify into foreign bonds. However with Japanese markets closed 2 days last week and last night as well, this week’s report may not show much diversification.

Keep an Eye on U.S. Yields

Last month, we said in order for USD/JPY to muster a sustained break of 100, 3 underlying changes need to occur – #1 U.S. bond yields need to recover, #2 the Nikkei needs to extend to new highs and #3 Japanese investors need to stop selling and start buying foreign bonds. While we haven’t seen the Japanese investment yet and the Nikkei was closed today so it failed to participate in the record breaking rally in U.S. stocks, one crucial criteria (U.S. bond yields) are beginning to recover.

Thanks to better than expected U.S. jobs data U.S. 10 year yields spiked higher on Friday. Between November and March, the rally in USD/JPY was supported by rising Treasury yields but in March, yields began to plunge as U.S. economic disappointments led investors to question the Federal Reserve’s ability to reduce stimulus by varying asset purchases. However the recent optimism from the Fed and Friday’s solid non-farm payrolls numbers could make the recovery in yields last and this shift in trend in alone could help USD/JPY break 100.

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