USD/JPY Retakes 105.00 as Market Eyes US Growth

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Market Drivers for January 8, 2014
USD/JPY retakes 105.00 as Nikkei rises
European unemployment
Nikkei 1.94% Europe .14%
Oil $93/bbl
Gold $1223/oz.

Europe and Asia:
AUD AIG Construction 50.8 vs. 55.2
EUR Trade 17.8B vs. 18B
EUR Unemployment
EUR Retail Sales

North America:
USD ADP 8:15
USD FOMC Minutes 2:00

USD/JPY regained the 105.00 barrier in Asian and early European session trade boosted by a strong rally in Nikkei and growing market anticipation of better US economic performance. Yesterday’s US Trade data which saw the deficit shrink markedly to -34B versus -40B eyed, laid down the foundation for the rally in the USD/JPY pair as many market analysts have now increased their estimates of US GDP growth in Q4 of last year.

Elsewhere the economic calendar has been very quiet today. In Australia the AIG Construction Index PMI slipped to 50.3 from 55.2 the month earlier, remaining just barely positive for the third month in a row. All three of the country’s PMIs have declined in the past month suggesting that growth Down Under continues to decelerate.

Tonight’s Retail Sales data which is expected to match last month 0.5% gain could be the key driver of near term trade in the unit. If the number misses the forecast indicating that consumer demand is weakening, it may reignite speculation of further rate cuts by the RBA in Q1 of this year.

The Aussie has weathered several attempts to break below the 8900 level but so far has held firm amidst buying from corporate accounts. However if the pair finally succumbs to the selling pressure it could quickly tumble to test the recent lows at 8850 as speculative sentiment towards the unit remains highly negative.

The euro meanwhile was slightly pressured through early morning European dealing dropping briefly below the 1.3600 level. The pair was pushed lower mainly due to EUR/GBP flows with the cross hitting a low of 8276 as it continues to weaken ahead of the ECB meeting. Although traders do not anticipate any policy changes from Mr. Draghi and company the broad consensus in the market is that the ECB policy will remain highly accomodative leading to a lower euro as the year progresses.

The bearish speculative stance is also supported by option market activity, with a reported 300M EURGBP 8200 strike put purchased yesterday suggesting that some market player believe that the downdraft in the unit will persist.

On the economic front the European calendar was also sparse with only German Trade Balance, EU Retail Sales and unemployment data on the docket. Retail Sales were better than expected printing 1.4% versus 0.2% eyed while unemployment was in line at 12.1% although data out of Italy showed further deterioration. None of the news had much impact on EUR/USD trade as the pair continued to drift lower throughout the morning on technical flows as shorts tried to push it towards the key 1.3550 support level.

In North American trade the market will focus on two key data points today with ADP report taking front and center stage at 1315 GMT today. The consensus view is around 199K and any figure around the 200K mark should prove positive for the dollar as it will confirm the view that US economy continues to expand at a steady pace. Later on the market will get a glimpse at the FOMC minutes which will provide a clue to Fed thinking about the taper. If the data proves supportive of the long dollar view the overnight moves could extend with USD/JPY pushing towards the key 105.50 resistance level as the day proceeds.

Boris Schlossberg
Managing Director

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