Hi, Friends, I hope that everyone is enjoying a pleasant weekend. New Zealand will get the ball rolling shortly as the FX market begins a new week. Some of the data out of Japan last week suggested that PM Abe’s attempts to get the economy rolling via an easier Bank of Japan and a weaker Yen might be having a positive impact. While USD/JPY remains in a downtrend, I wouldn’t be surprised to see it test the 61.8% Fibonacci retracement level (99.92 on the daily, so let’s call it par) before pulling back in the direction of the primary trend, which remains down at present.
Still, nothing is forever; if USD/JPY is going to take the 100 (par) level out and move higher, I would expect to see something around 97.50 hold (which would of course form a higher low). Movements in the Nikkei stock averages have been reasonably well correlated with those in USD/JPY. Since both markets are responding to policy changes, it makes sense that they would generally move in synch, with some ebbs and flows having to do with different supply and demand dynamics in the two assets. If the Nikkei does get hit on the back of a soft session for U.S. stocks on Friday, I would expect USD/JPY to pull back farther than would be the case given a strong Japanese equity market.Â
It’s worth keeping in mind that a lot of senior FX people take this week off; given that the U.S. Independence Day holiday falls on a Thursday, this will be in many respects a 2 1/2 day week, as people will begin easing toward the exits as early as possible on Wednesday afternoon. It doesn’t mean that nothing will happen; the important non-farm payrolls report will be released on Friday, and some hedge funds enjoy the additional impact that their trades can have in relatively illiquid markets. The people remaining on bank trading desks won’t be feeling heroic, so the possibility of an exaggerated move will certainly be present.
Best of luck!
P.S. USD/JPY did rise, but has only been as high as 99.74 thus far. The quarterly Tankan survey improved to +4 from a -8 for the first quarter, which should help to support USD/JPY (and Japanese stocks). I should have mentioned yesterday that the first day of a new quarter typically brings in new allocations from pension plan sponsors and 401(k) plans. A decent percentage of those contributions should be earmarked for stocks. Managers receiving new inflows will typically put them to work quickly, either by buying stocks or, if price levels are deemed unappealing, purchasing futures. Otherwise, they risk falling behind their benchmarks (“tracking error”).Â
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