How USD/JPY Could Drop to 100.00

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Market Drivers for May 16 2014

FX steady in lackluster Friday trade

USD/JPY stabilizes at 101.50 as US yields at 2.50%

Nikkei -1.41% Europe -.13%

Oil $101/bbl

Gold $1292/oz.

Europe and Asia:

JPY Revised IP 0.7% vs. 0.3%

EUR French NFP -0.1% vs. -0.1%

EUR Italian Trade Balance 3.87B vs. 2.47B

EUR Trade Balance

North America:

USD Building Permits 8:30 AM

CAD Securities Purchases 8:30 AM

USD U of M 10:00

Currency markets were extraordinarily quiet on the last trading day of the week with most of the majors tracing out very narrow 10-20 pip ranges amidst little fresh newsflow and an essentially barren economic calendar.

The dollar remained on the back foot, hampered by the ever shrinking US Treasury yields, but appeared to have stabilized after suffering steep losses against the yen yesterday. With US 10 year yield steady at the 2.50% level USD/JPY found some footing at the 101.50 level as risk aversion flows have eased.

The pair has enjoyed very strong support at the 101.00 figure having found buyers four times at that level since the start of the year, but much of the thesis behind the long trade is based on the widening yield differentials between the two currencies – something that has not happened this year. Indeed, the USD/JPY trade was perhaps the biggest consensus recommendation in 2014 but so far has failed miserably as it languishes near the yearly lows.

What is perhaps most surprising is that the decline in US yields has occurred against a relatively robust US economic background with the most recent data points yesterday showing an uptick in Empire, Philly Fed and a sharp drop in jobless claims. For now however, the Treasury markets are ignoring the news as flight to safety moves out of European periphery bonds are dominating the price flow.

Today the North American calendar remains subdued, but traders will look carefully at the latest housing data and consumer sentiment numbers. The market anticipates a small improvement in housing starts and building permits and very slight uptick in U of M report. If the US releases surprise to the upside they may provide a temporary bump to USD/JPY and could push the pair towards the 102.00 level.

However, some analysts including the famed bond king Jeff Gundlach are predicting “the mother of all short covering rallies” in the US Treasury complex. Indeed other analysts have pointed out that massive short open interest on 10 year futures could provide the fuel for such a move. If that scenario pans out then USD/JPY could drop below 100.00 triggering a massive liquidation move in FX as well.

Boris Schlossberg
Managing Director

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