Dollar Rallies in Asia – Can US Extend?

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Market Drivers May 28th, 2013
Surge in Nikkei takes USD/JPY through 102.00
Europe quiet post holiday as markets look to US for direction
Nikkei 1.20% Europe 1.44%
Oil 94.43/bbl
Gold $1384/oz.

Europe and Asia:
JPY Small Business Confidence
CHF Trade Balance

North America:
USD Consumer Confidence 10:00

Its been a very quiet post holiday trade in the currency market with all of the action coming out of Asia session where a resurgent Nikkei put the bid back in USD/JPY lifting the pair back through the 102.00 figure. The Nikkei recovered from its Monday sell-off closing up 1.20%. The index swooned nearly -10% in the three prior sessions as volatility in the JGB market put pressure on stocks and USD/JPY, so today’s recovery in equities triggered a sharp short covering rally in FX.

Although USD/JPY appears to have found support near the 101.00 level, the pair continues to consolidate its recent gains and may be vulnerable to further correction if the JGB market turns turbulent once again. Japanese officials are keenly aware of the risks in the sovereign debt market, but are not in a state of panic regarding any possible selloff in the JGBs.

The reason for the relative calm amongst Japanese monetary and fiscal officials is the fact that the balance of Japanese banks are much healthier than they were in 1990’s and therefore the financial sector could absorb some losses on their book. Today, Koichi Hamada who is a close advisor to Prime Minister Abe even argued that the banks could offset their losses on their bond positions with gains on the stock valuations.

Still despite today’s rebound the rally in USD/JPY appears to have topped out for now as investors grow a bit more cautious about the implications of Abenomics on the JGB market and the pair is likely to remain rangebound as traders seek more await more data. One factor that could help the pair to rally further is the latest readings from the US economy. To that end today’s Case Shiller numbers on housing and the Consumer confidence data could determine if the recovery in USD/JPY extends or falters.

Elsewhere the dollar rally appears to have ran into a wall against the high beta currencies. The greenback rallied against euro, cable and Aussie in Asian session trade with those curreciencies breaking below 1.2900, 1.5100 and .9600 respectively but the buck has since given up those gains as risk RX rebounded. The Aussie in particular staged a strong recovery in European session after re-testing support at the .9600 level in late Asian dealing. The unit was hurt by an alarmist newspaper article that suggested that the Australian economy may have hit a secular peak as the mining begins to decline which could lead to a multi year unwind of the investment trends that have made Australia the envy of the G20 universe.

There is no doubt that sentiment towards Aussie remains highly negative, but with the pair so grossly oversold and so close to the 9500 cent level it now looks like a bargain to many reserve diversification officers across the world who continue to eye the G10 leading yield with desire. Therefore the pair is likely to find stronger support around these levels and may see a rebound as the week proceeds.

Boris Schlossberg
Managing Director

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