Intraday Market Thoughts Archives

It may be true that most countries want a bit of FX weakness but there is a limit. Japan is beginning to show signs of strong growth and the USD/JPY rally abruptly ended Thursday on an FX quip from Fin Min Taro Aso. On the day, CHF led the way while the antipodeans lagged. The focus will remain on the yen with a slate of top-tier economic data up next.

It's been a generation since markets have had to deal with a strong Japanese economy and at the moment, the reaction is total skepticism if not disbelief. But Japan has strung together a few good months and the consensus for 2015 growth has moved close to 2% from 0.9% at the start of the year.

We don't know if Abenomics is really working but Japanese officials have maintained an upbeat outlook and talk of more QE has fallen to the wayside. If they believe they can achieve solid growth – which is anything close to 2% in Japanese terms – then they might believe USD/JPY at these levels is high enough.

The pair hit an airpocket on Thursday when Aso said recent currency moves were rough and that he will monitor forex moves carefully. USD/JPY quickly fell to 123.63 from 124.10 in the aftermath. We warned yesterday about the possibility of this type of comment and it will continue to be a risk in the pair.

Like the US, the outlook for the yen is data dependant. On the docket next is the jobs report and CPI at 2330 GMT, followed by industrial production 20 minutes later. National CPI is expected up just 0.6% in April so there is no immediate danger of nearing the 2% BOJ target.

April IP is expected up 1.0% m/m.

A day of consolidation wouldn't have been a black mark for the US dollar but it shrugged off earlier losses and rallied in New York trading. On the day, the kiwi and Swissy were the top performers while the yen lagged. Japanese retail sales and Australian capex numbers are due later.

USD/JPY stormed ahead once again on Wednesday before it finally ran into resistance. The late-day high was 124.07, just shy of the 2007 top at 124.14. A break above that would be the best level for the pair since 2002.

Initially at least, that level proved to be solid resistance and some profit-taking pushed the pair back to 123.69. At such a critical long-term level, unless there is a resounding rejection in the next day or two, it points to a break. One space to watch closely is the G7 finance ministers meeting in Germany. If Japanese leaders signal that they don't want further yen weakness, the trade could turn around.

Overall, it was another day of broad gains for the US dollar. In European trading, it looked as though the dollar may sag and consolidate the gains of the past week but instead, it continued to power higher. One exception was against the euro after chatter from Greece that a deal with creditors was close.

Early in Asia, more headlines indicated the sides were nearing agreement and when there is smoke, there is probably fire. But after 6 years of Greek drama, we've learned to never trust a headline and be prepared for anything.

Due up later, it's Japanese retail sales for April at 2350 GMT. The consensus is for a healthy 5.4% y/y raise as we finally get past the skew from the consumption tax increase.

Afterwards, at 0130 GMT, it's the Australian Q1 capex report. The Q42014 report showed a 2.2% fall compared to 1.6% expected and that marked the top in AUD/USD for the next month. This report is expected to show a further 2.4% q/q decline.

Weekend comments from Fed Vice-Chair Stanley Fischer were largely ignored but his optimism on growth and concern about low inflation bears closer scrutiny. The trading week begins with mild US dollar strength. CFTC positioning showed fewer euro shorts and CAD traders caught wrong-footed.  After stronger than expected US core CPI figures on Friday and headline-gabbing remarks from Greece interior minister indicating his country has ran out of money,  EURUSD was stopped out and GBPUSD remains in progress.

The week begins with a holiday and the United States, Hong Kong, South Korea and parts of Europe so trading will be thin. The long weekend may have let Fischer slip some important comments in under the radar at a central banking conference in Portugal.

“It's sort of ironic that at the present we have an output target and we have an inflation target, which are supposed to be conflicting, but we're more or less there on the output target,” he said. “We are not there on the inflation target, so that we have to put in a lot more steam.”

Yellen has generally been concerned with improving employment and gaining confidence in 2% or better growth with a secondary focus on inflation. If Fischer believes the economy is at full capacity on output, it shows he believes hikes could be coming sooner.

For her part, Yellen was moderately upbeat in her speech Friday and brushed aside soft Q1 data once again.

Other news from the central bank forum included more prodding for structural reforms from Draghi while Kuroda reiterated the BOJ would reach its inflation target around the first have of FY 2016.

Looking ahead, today's Asia-Pacific calendar includes April Japanese trade balance at 2350 GMT. A deficit of 351.1B yen is expected.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -168K vs -179K prior 

JPY -22K vs -23.5K prior

GBP -23K vs -31K prior

AUD +7K vs +4.5K prior 

CAD +4K vs -4K prior

CHF +9K vs +10.5K prior

Given the renewed slump in the euro, that was probably a short term 'bottom' in net shorts. If you're a USD/CAD long, the report is good news. It shows a balanced market before the latest rally in the pair. If oil sinks, the pair could have plenty of upside.