USD Gone Too Far For Now? JPY Weakness Could Slow
Saxo Bank | May 20, 2013 05:11AM ET
The market is trying to decide whether the US dollar has bitten off more than it can chew this week. Meanwhile, the Japanese government has issued JPY-supportive comments – these could be a game changer.
Japan’s Economy Minister Akira Amari made comments overnight on the yen, saying that its “excessive strength has been largely corrected and that further weakness could be harmful”. These comments were interesting indeed and suggest that Japan’s leadership wouldn’t mind if things went slower from here on the currency front, particularly if that would help stabilise he bond market, which has been worryingly volatile of late – we have to remember that Japan is a nation of bond investors and this instability in bond markets was not at all part of the plan.
From here, the weakness in the JPY could slow dramatically and if not, it would likely be due to ongoing weakness in Japanese bond markets, which in turn would hasten a possible dramatic policy response from Team Abe. My guess is that the JPY crosses are about to get far more “two-way” in their behaviour very soon. In the major JPY crosses, keep an eye on the 101.85 area in USDJPY and the 131.15 area in EUR/JPY. The USD/JPY situation is doubly interesting because we had the crazy extension in USD/JPY above 103.00 late Friday – so there’s a bit of a pattern reversal on the chart at the moment. Stay tuned there and please realise that we have a Bank of Japan meeting on Wednesday.
Chart: EUR/USD
After a remarkably persistent fall for most of last week, we have EUR/USD trying to poke above the lowest of the resistance levels of about 1.2850 this morning. Any consolidation in EUR/USD doesn’t look particularly threatening for the near term as long as we remain below the 1.3000/50 area, but if we spend too much time dilly-dallying, the energy would begin to seep out of the sell-off. Note the obvious head and shoulder formation with the neckline not much beyond the Friday lows. The most interesting near-term resistance is the 38.2 percent Fibo retracement at 1.2950 if we stay in consolidation mode early this week.
Looking ahead
The central bank noise this week is considerable with the BoJ on Wednesday. We also have the RBA’s last meeting minutes up tonight, and the BoE and FOMC minutes from their most recent meetings up on Wednesday. It will be tough to extract much meaning from tonight’s RBA minutes as the most interesting development in Australia is the adjustment in the currency, and the bulk has happened in the two weeks since that meeting (AUDUSD was trading at about 1.02 on May 7). Still, the prominence of the discussion surrounding the currency could hint at how the RBA will react to the move that has now taken place. The market is only pricing in a bit more than 25 more bps of easing for the coming year.
Get The News You Want
The FOMC minutes later this week will be key the USD outlook for the near term as the data stream from the US has been highly confusing to say the least. On that note, the key data points from the US this week are second-tier stuff, with Existing Home Sales for April up on Wednesday and then on Thursday, we have the weekly jobless claims number (plot thickening there – had the best number in five years two weeks ago followed by a massive jump last week; what’s the trend?) and the April New Home Sales data. Friday features the April Durable Goods Orders data.
Economic Data Highlights
- New Zealand Apr. Performance of Services Index out at 56.1 vs. 55.6 in Mar.
- UK May Rightmove House Prices out at +2.1% MoM and +2.5% YoY vs. +0.4% YoY in apr.
- Japan Apr. Nationwide Department Stores Sales out at -0.5% YoY vs. +3.9% in Mar.
- US Apr. Chicago Fed National Activity Index (1230)
- US Fed’s Evans to Speak in Chicago (1700)
- Australi RBA Policy Meeting Minutes (0130)
- New Zealand Apr. Credit Card Spending (0300)
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