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USD/JPY: Pause or Bottom?

Last updated 2/2/2009 5:57 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• USD/JPY: PAUSE OR BOTTOM?
• GBP/USD: HIT BY BARCLAYS DOWNGRADE
• EUR/USD: THE NEW HIGH YIELDER?
• AUD/USD: RBA EXPECTED TO CUT INTEREST RATES 100BP
• NZD/USD: BREAKS 50 CENTS INTRADAY FOR FIRST TIME SINCE 2002
• USD/CAD: FOLLOWS OIL PRICES LOWER
• USD/JPY: WAITING FOR ACTION FROM THE US OR CHINA

EXPECTATIONS FOR UPCOMING FED MEETINGS

USD/JPY: PAUSE OR BOTTOM?

The dramatic intraday rally in the US equities has helped many currency pairs recover their earlier losses.  After having sold off to a 7 week low against the US dollar, the Euro managed to end the US trading session in positive territory.  The prospect of interest rates remaining unchanged on Thursday is helping the EUR/USD outperform its peers.  Other currency pairs were not lucky enough to turn positive like the Euro, but they are still well off their lows.  The rebound may suggest that risk appetite is improving, but given that risk appetite can change as quickly as teenage trends these days, it remains to be seen whether the recovery will last.  More layoffs have been announced adding to more significant job losses in the first few months of the year.  Macy’s announced that they will be reducing their workforce by 7,000 employees and unfortunately there is talk that Morgan Stanley and Goldman Sachs are considering a second round of layoffs.  Non-farm payrolls are due for release on Friday and announcements such as these could lead to a resumption of risk aversion ahead of the report.

Dollar Unfazed by Mixed Economic Data

Although the US economy remains weak, there were a few upside surprises in economic data.  Manufacturing sector ISM rebounded in the month of January while construction spending and personal income fell less than expected.  Personal spending on the other hand dropped for the sixth consecutive month.  Overall the manufacturing sector is still in very bad shape the rebound will probably not last.  As for personal income and personal spending, Americans are feeling pinched and so they are finally saving more than they are spending which should be a new trend ( more on ISM and personal spending ).  Pending home sales is the only piece of US economic data due for release over the next 24 hours.  The housing market is in still in trouble and any increase in home sales will be discounted.  Over the next 48 hours, the chatter in the markets will be centered on the stimulus package which is up for a full Senate vote on Wednesday and the upcoming non-farm payrolls report.  If investors are more optimistic about the stimulus package than they are pessimistic about the NFP number, we could see a further improvement in risk appetite.  Unfortunately we think investors will realize that any package will not be ready for President Obama to sign until mid February at the earliest and therefore risk aversion has a greater chance of resuming.  

USD/JPY Trading Range Could Compress in February

Meanwhile the only currency pair that has consistently sold off on disappointing US economic data and rallied on upside surprises over the past few months is USD/JPY.  However recently, the currency pair has been trapped within a 300 pip trading range.  After falling more than 20 percent since the summer of 2008, the stabilization in USD/JPY has led many traders to wonder if this is a pause before further losses or a bottom.  Theoretically, if USD/JPY continues to trade off US economic data, it should fall because the US economy is a long way from recovery.  Furthermore, the non-farm payrolls report for the month of January is due for release on Friday and the prospect of another month of major job losses could keep investors risk averse.  However, the Yen has rallied significantly and USD/JPY at 87 could very well be the “uncle” point for the Bank of Japan.  One argument for why this may be a near term bottom for the dollar against the Yen is the possibility of a tighter trading range for the currency pair in the month of February. 

Taking a look at more than 30 years worth of data, we have found that on average the trading range in USD/JPY tends to compress in the second month of the year. In fact, of all 12 months, the average trading range in USD/JPY is the lowest in February. A narrower trading range could mean stability for USD/JPY because high volatility hurts Yen crosses.  Although there is no trend in ATM 3 month volatilities, there significance of the tighter trading range should not be ignored.  

GBP/USD: HIT BY BARCLAYS DOWNGRADE

Not only was the British pound the biggest market mover on a percentage basis today, it also fell the most against the US dollar.  The primary catalyst for the sell-off was the downgrade of Barclays bank by rating agency Moody’s.  Their concern centers around the bank’s exposure to residential real estate in the US and commercial real estate in the UK.  Last year, the bank rejected government funding but with the downgrade, there is now fear that the bank may soon be forced to seek government assistance.  Economic data was actually stronger than expected with manufacturing sector PMI rising from 34.9 to 35.8 in the month of January.  Unfortunately like in the US, the manufacturing sector has been hit hard and the rebound is off of very low levels.  Construction sector PMI and nationwide consumer confidence are due for release on Tuesday.  Both reports are expected to be pound bearish.  The Bank of England is expected to cut on interest rates on Thursday and even the biggest snowstorm in 18 years should not stop them.  

EUR/USD: THE NEW HIGH YIELDER?

It is very surprising that even on a day with pronounced levels of risk aversion the euro is able to end the day in positive territory. Against the dollar, the euro is up marginally, but EUR/GBP is a strong victor as a result of the expected outcomes of this week’s round of rate decisions. The reason behind today’s resilience can most notably be attributed to the possibility that the ECB will hold rates steady on Thursday. This will theoretically make the euro a high-yielding currency, as the spread between similar rates in the US, UK, and Japan continues to widen. Once more, as the RBA and RBNZ are poised to continue their rate cutting regime, we may see the euro provide one of the highest interest rates out of the major currencies. In a mixed bag of economic data, the health of European manufacturing appears to be steadying. French, Italian, and German PMI were either above or at expectations, while the Eurozone as a whole only came in very slightly under consensus. These signs of stabilization are one of the most desperately needed facets to the financial markets. Expected for tomorrow are Eurozone Producer Prices but the big focus this week is the ECB rate decision.

AUD/USD: RBA EXPECTED TO CUT INTEREST RATES 100BP

The Australian, New Zealand and Canadian dollars extended their losses against the greenback.  This evening, the Reserve Bank of Australia is expected to cut interest rates by 100bp to 3.25 percent.  Like the RBNZ, the RBA has been late cutting interest rates and are making up for it by cutting in size.  Their last rate cut was a full percentage point and the only uncertainty now is whether they will over deliver. The Australian economy has not been immune to the global slowdown but comparatively speaking, they have held up better than their peers.  Manufacturing sector PMI rebounded in January while inflation edged higher.  The trade balance is due for release before the rate decision and there is a chance that we may actually see the surplus rise because the export component of manufacturing PMI rose in December and January. If the RBA cuts by more than 100bp, we could see a fresh 2 month low in the AUD/USD but also keep an eye out for comments from the RBA Governor who may talk about how much further rates could come down over the next few months.  Meanwhile, the New Zealand dollar broke 50 cents on an intraday basis for the first time since 2002.  Although NZD economic data was mixed, the currency remains under pressure after the recent rate cut.  As for the Canadian dollar there was no data released, but lower oil prices contributed to the currency’s sell-off.

USD/JPY: WAITING FOR ACTION FROM THE US OR CHINA

Japanese Yen crosses remained under pressures despite the intraday recovery in the Dow.  There are not that many Japanese economic releases on the calendar this week which means that little is expected from Japan.  This will leave the Yen crosses to the whim of the market’s risk appetite, which is really nothing new.  The only hope for Japan as a country is a stimulus package for their two largest trading partners.  The Obama Administration is on its way to announcing a package to help the US economy.  Last night, Prime Minister Wen of China said that they are considering fresh measures to bolster their economy beyond the USD$585B stimulus package that was announced last year.  The only way for Japan to recover would be if their trading partners recovered first. Labor Cash Earnings is the only economic report to be expected for tomorrow.

AUD/USD: Currency in Play for Next 24 Hours

The AUD/USD will be our currency in play over the next 24 hours. The main event risk for tomorrow’s trading will be in the form of the RBA rate decision, scheduled for 10:30 pm ET or 3:30 am GMT. In addition, we will also receive the Australian Trade Balance at 7:30 pm ET or 00:30 GMT and the US Pending Home Sales at 1:00 am ET or 15:00 GMT.

AUD/USD has been cycling in and out of the sell zone over the past few days, and currently finds itself in a developed downtrend. The story is the same for most currency pairs in that we are quickly approaching the major lows incurred at the height of the frenetic panic in October. These levels present a certain psychological impediment and can serve as support. For support we will be using the most recent low set in November at 0.6080. Just slightly below that is the October low. Resistance can be determined as two levels, the first at the recent high of 0.6731 and the second at the more major swing high at 0.7268. If the markets should be disappointed tomorrow, there is a good chance the 0.6080 low will be tested. If it is broken, expect a strong and sustained decline to ensue.

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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.