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USDJPY HITS FRESH 15 YR LOW ON RISK AVERSION

Last updated 9/7/2010 5:21 PM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USDJPY HITS 15 YR LOW ON RISK AVERSION
• EUR: COULD THE PUBLICITY STUNT BACKFIRE?
• GBP: SIGNS OF STRONGER SPENDING
• CAD: WILL THE BOC RAISE RATES?
• AUD: LABOR WINS, RBA HINTS OF RATE HIKE?
• NZD: GOLD UP, OIL DOWN
• JPY: BOJ HINTS OF MORE EASING

EXPECTATIONS FOR UPCOMING FED MEETINGS

USDJPY HITS 15 YR LOW ON RISK AVERSION

countdown to the end of the year begins.  Volume typically picks up this time of the year as investors, funds and trading desks scramble to bank additional profits before the volatility dries up during the holidays and trading books are officially closed.  In many countries except for the U.S., this will be a shortened but busy trading week. With the Beige Book report and the trade balance being the only significant U.S. data scheduled for the release, traders will have have to look beyond the U.S. dollar.  The price action in the financial markets today shows that investors are already reacting to the developments in other parts of the world. U.S. stocks and bond yields are down sharply after a Wall Street Journal article raised fresh concerns about the European banking sector and the “real” exposure of banks to the sovereign debt of high risk nations. The euro sold off aggressively driving the U.S. dollar sharply higher in the process. The financial markets are in risk aversion mode with the dollar rising against every major currency except for the Japanese Yen and it may be difficult to shake off the pessimistic mood. 

Will the Japanese Save USD/JPY?

We have long believed that USD/JPY would retest its August lows and now that it has done so, we continue to believe that the currency pair is headed even lower. However if there is a time that the Japanese government would consider intervening in the Yen, it would be over the next week ahead of the Democratic Party of Japan’s leadership election. Prime Minister Kan is neck to neck with rival Ichiro Ozawa and intervention could just what the PM needs to tip the party’s support in his favor.  If USD/JPY falls 83, the possibility of intervention increases ten fold and we could go from empty threats to a real battle against Yen strength. Below 83.52, there is no major support in USD/JPY until the April 1995 low of 79.75. This level is significant not only because it is the next support level but also because it is the record low. Therefore the intervention danger zone is between 82 and 79.75. If USD/JPY moves into this level before the September 14 ^th election, the Japanese government could sweep in to save the currency and the Prime Minister’s job.  

Could the Beige Book Help?

Meanwhile risk appetite may receive help from tomorrow’s Beige Book report. Friday’s non-farm payrolls numbers were much better than expected and suggest that the labor market may be improving. Back to school sales have also been fairly good. According to Thomson Reuters, total sales for retailers rose 3.3 percent in August compared to a forecast of 2.5 percent. Although retailers are still relying on discounts to move inventory, tax free shopping weeks in 17 states and more optimism has made Americans more willing to spend this season compared the same time last year.  The back to school sales season which typically lasts for 2 months from July to August is the most important selling season for U.S. retailers next to the holiday shopping season. The stronger results will give retailers hope that Christmas spending could also be a bit stronger this year. The Beige Book report should acknowledge the pickup in spending and the labor market. However, the tone of the report will most likely remain cautious as the signs of improvement are very recent. 

EUR: COULD THE PUBLICITY STUNT BACKFIRE?

The European sovereign debt crisis has come back to haunt the euro.  In the beginning of the year, European debt problems drove the EUR/USD from 1.45 down to 1.1877. When the fears receded, the euro climbed back above 1.33. However now that the fears that have gripped the currency for most of the year has returned, the euro is once again under aggressive selling pressure. It certainly did not help that German factory orders surprised to the downside or that bond redemptions are particularly strong this time of the year, but the primary reason why investors have dumped euros is because of new reports that the stress tests on banks missed a significant amount of debt. The Wall Street Journal broke the story and according to their report, the total exposure of banks varies widely depending upon the source of the information. For example, the stress tests showed that French banks only held EUR 6.6 billion worth of Spanish debt and EUR11.6 billion of Greek debt. However according to the Bank of International Settlements, their holdings of Spanish debt was EUR35 billion (5 times more than the amount reported in the stress tests) and their holdings of Greek debt was approximately EUR20 billion. Even the midyear results from individual banks showed different numbers than the stress tests.  Why the big difference? The report reveals that some banks excluded certain bonds while many reduced the sums to account for short positions.  When the results of the tests were first released, economists screamed about their leniency and credibility, but investors quickly shrugged off those concerns and moved on. Unfortunately, the problems have now returned and if there is more investigation into the latest discrepancies, the original publicity stunt could backfire. Meanwhile the surprising decline in German factory orders does not bode well for tomorrow’s German trade balance and industrial production reports. Factory orders fell 2.2 percent in the month of July which was the largest drop since February 2009. Disappointing data will cause investors to lose confidence in the euro but the fate of the currency hinges on how long the European debt problems remain in the headlines. 

GBP: SIGNS OF STRONGER SPENDING

The British pound also weakened against the U.S. dollar but not by the same degree as the euro.  Gilt redemptions are very popular this time of the year but the main reason why sterling is having a tough time rallying is the economy. If you recall, last week, we learned that service, manufacturing and construction sector activity slowed in the month of August. If last night’s BRC retail sales report showed weakness in consumer spending, we could have seen a deeper selloff in the GBP.  However, the latest numbers showed that same store sales rose 1.0 percent in August which was slightly more than the 0.5 percent gain in June. Back school sales drove demand for clothing and footwear which is good news for the UK economy. Yet the Director of the BRC warned that “anxiety about job cuts and tax rises is putting people off making major spending commitments.” “Renewed weakness in the housing market particularly affected the furniture and flooring sector.” An increased in the VAT from 17.5 to 20 percent could lead to a rush of buying before January followed by a significant falloff next year. On Friday, we said the GBP/USD was primed for a breakout and based upon the price action, the downside is being tested. The BRC shop price index is due for release this evening followed by industrial production on Wednesday. The sharp slowdown in manufacturing activity suggests that industrial production growth could surprise to the downside. If that is the case, the GBP/USD could extend even lower. 

CAD: WILL THE BOC RAISE RATES?

The Canadian, Australian and New Zealand dollars weakened against the greenback with the loonie falling more than 1 percent against the U.S. dollar.  Considering that most economists expect the BoC to raise interest rates for the third time in a row, the weakness in the CAD can be particularly mind boggling.  The fear is that the BoC will once again downplay the significance of their decision and remain noncommittal about future rate hikes. Unlike the Australian and Japanese decision, the Canadian dollar should have a reasonable reaction to the Bank of Canada's announcement tomorrow.  Of the 4 central bank meetings this week, Canada is the only country expected to alter interest rates. Economists are calling for a 25bp rate hike which would be the Bank of Canada's third consecutive move. Despite being one of the more aggressive central banks, the BoC has managed their rate moves well enough that the Canadian dollar is not trading at parity with the U.S. dollar.  The secret is that each time they raised interest rates, they were very noncommittal about future rate hikes and we expect this to remain true this month.  Recent economic data out of Canada has been mixed with the trade deficit expanding and growth slowing. The latest GDP numbers show the economy slowing sharply in the second quarter but on a month to month basis, the economy is still growing.  Retail sales rose a tepid 0.1 percent in June and excluding auto purchases, sales declined 0.5 percent.  This confirms that consumer spending is slowing but not enough to deter the BoC from raising interest rates.  What we have to remember is that the BoC is normalizing monetary policy which is slightly different from tightening monetary policy.  If the economy is improving, then emergency level rates are no longer appropriate.  However whether the rate hike expected on Wednesday will be the BoC's last hike of the year will hinge on domestic spending accelerating and the U.S. economy stabilizing in the last quarter of the year. In addition to the rate decision, building permits and the IVEY PMI report are also scheduled for release from Canada.  Meanwhile the resilience of the Aussie shows that Australians are breathing a sigh of relief today after the political gridlock came to an end with the Labor Party snatching enough votes to form a minority coalition government under the leadership of Julia Gillard.  The tone of the RBA statement also suggests that they may not be done raising interest rates.  

JPY: BOJ HINTS OF MORE EASING

Japanese Yen crosses fell across the board as risk aversion swept through the financial markets. The Bank of Japan left interest rates unchanged last night and said it would “"carefully examine the outlook for economic activity and prices, and, if judged necessary, take policy actions in a timely and appropriate manner."  The inclusion of this message in their statement suggests that the central bank is actively considering additional stimulus. Given the recent strength of the Yen and uncertainty surrounding the U.S. economy, this mentality should not surprise anyone because if the Yen continues to rise, it will have damaging repercussions of the Japanese economy. According to BoJ Governor Shirakawa, “Against the backdrop of increased uncertainty about the future, especially for the U.S. economy, and associated instability in the foreign exchange and stock markets, attention should be paid to downside risks to Japan’s economy.” Having expanded their credit program by 10 trillion yen on August 30 ^th , the BoJ is open to doing more. Unfortunately the Yen has not receded after these dovish comments and the higher the currency rises, the greater the need for additional stimulus. If the Fed added this little line to their statement, the dollar would have a much more significant reaction. Instead, investors have become immune to the BoJ’s threats and will probably remain immune until they follow up with action. In terms of economic data leading indicators fell slightly in the month of July while the coincident index edged slightly higher. Machine orders, the current account and trade balance reports are scheduled for release this evening. 

USD/CAD: Currency in Play for Next 24 Hours

USD/CAD is the currency pair in play tomorrow. Canada has building permits scheduled for release at 8:30am ET / 12:30 GMT followed by the Bank of Canada rate decision at 9:00 am ET / 13:00 GMT and the IVEY PMI at 10:00am ET / 14:00 GMT. The U.S. on the other hand will be releasing its Beige Book report at 2:00pm ET / 18:00 GMT. 

Since the beginning of May, USD/CAD has been trading in a very wide range that spanned from a low of 1.0109 to a high above 1.08. This range remained intact with today’s rally which broke the downtrend in USD/CAD and placed it right back into the Range Trading Zone, which we determine using Bollinger Bands. Despite the prospect of a rate hike from the Bank of Canada, which could easily alter the trend in USD/CAD, the strength of today’s rally suggests that the currency pair could test its resistance level of 1.0570, which is the first standard deviation Bollinger Band. If resistance is broken, USD/CAD could race towards 1.07. However, should the Canadian dollar rally, USD/CAD could find itself trading back at support which is today’s low of 1.0345. 

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Comments (1)

syd

September 07, 2010 at 11:10 PM ET

Is there any plausible explanation as to why the BoJ may be intervening to maintain the strength of the Yen? I heard it today from an analyst!! To me this suggestion has no foundation.

Note: I am not a professional trader, nor do I work in the finance industry.

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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.