U.S. PPI and BoJ Provide Signal Upside Potential in USD/JPY

Last updated 3/17/2010 9:02 AM ET (GMT -5) 4 Comments

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Kathy Lien

Director of Currency Research, GFT

If you are wondering why the Fed did not remove the pledge to keep interest rates at an extremely low level for an "extended period" of time yesterday, just take a look at this morning's producer price figures.  Inflationary pressures in the U.S. are extremely modest and the lack of inflation gives the central bank the flexibility to leave monetary policy easy for longer than otherwise.  The Fed may not have had the PPI report in their hand prior to their meeting, but they would have seen the import price report which had already reported softer price pressures.  Producer prices fell 0.6 percent in the month of February due primarily to a big drop in energy costs.  Excluding food and energy, producer prices actually rose 0.1 percent.  However, with oil prices increasing materially since then, the decline in PPI should be temporary.  Therefore we still believe that at the end of the day, the Fed is closer to actually tightening monetary policy than its European counterparts.  Furthermore, despite the hot employment numbers from the U.K. this morning, investors feel there is greater risk in putting their money in Europe than in the U.S. at this time. For this reason we are still bullish dollars, particularly against the Yen.

Another Reason Why USD/JPY Could Rise:  Bank of Japan Increases Stimulus

Meanwhile, the big event overnight was the Bank of Japan announcement.  The central bank doubled the size of their special lending program to 20 trillion yen, making them effectively the most dovish G7 central bank. Interest rates were left unchanged at 0.1 percent, but that did not stop the Japanese Yen from trading lower against all of the major currencies.  Given that the central bank upgraded their economic outlook for the first time in 8 months earlier this week, their move was clearly an attempt to pacify government officials who have been on their backs to use monetary policy to jumpstart inflation.  Not all members wanted to bend over backwards for the politicians however - for the first time since last October, Noda and Suda dissented.  In a statement released after the monetary policy meeting, the BoJ said "Japan's economy is picking up, mainly due to various policy measures taken at home and abroad, although there is not yet sufficient momentum to support a self-sustaining recovery in domestic private demand." Shirakawa also said ""Showing the BOJ's clear stance against deflation will help ensure an improvement in the economy and prices." The question now is whether the BoJ's act will be effective in bolstering prices.  The BoJ has increased the money supply, but this is not the real problem - the main issue is that Japanese consumers are not willing to take money out of their wallets and spend. Although the Japanese Yen did not have a big reaction because the announcement was not much of a surprise, it provides an additional reason why the Japanese Yen could extend its losses against the U.S. dollar. 

Comments (4)

FXDragon

March 17, 2010 at 10:03 AM ET

For some reason i feel short usdjpy this month. Anyone feel the same vibe?
The only thing that worries me is that im a degenerate loser:)

Silenus

March 17, 2010 at 10:56 AM ET

I'm with you on this one, Dragon.
200 day MA closing in fast plus real thin kumo next week.
Short under 91.30 with an soft target of 89.30 probably more if we get momentum.
Stop would be a daily close above the 200 MA (circa 91.70)
Doesn't get easier than this!

MoneyManager

March 17, 2010 at 05:39 PM ET

Truly hope you are right, because I would load the wagons long like I haven't loaded them in many years around 89. A move to that level would signify nothing important long term, and it's certainly possible short term. I'd love to see it.

MoneyManager

March 17, 2010 at 05:51 PM ET

Easier than this, you say? ^_^ Maybe, but here's a quick little quiz for you. In the past decade, on a daily bar basis, how many bars have a high of less than 87? If you answered "zero", give yourself a pat on the back. Despite printing below 85, there has yet to be a single daily bar with a high below 87. That is the stuff of exhaustion blow off highs or lows. In fact, there have been only five bars with highs of less than 88 in the past decade: the last 3 in November and the first 2 in December. Those levels are not going to give way without massive selling. If they *do* give way, it could get interesting. But the play is to go long around those levels and bet that they will hold. That's where the risk/reward is.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.