USD/JPY
The Yen soared as concerns over Spain’s credit rating and a rise in U.S. initial jobless claims sparked broad based risk aversion. The yen has regained its top status as a funding currency which has made risks trends more prevalent in determining price action. Currently equity markets and the Asian currency are holding a 30% correlation which should rise as both sharply fell on the day. U.S. interest rate expectations are have continue to have influence over the pair as the outlook for spreads to rise impact’s the dollar status as a funding currency which increases the yen’s safe haven status.
BoJ Interest Rate Expectations
Overnight Index Swaps are pricing in 2 bps of tightening over the next twelve months for the BoJ as there is virtually no chance that the central bank will raise rates. Policy makers are forecasting three years of deflation making any tightening prohibitive. Therefore, upcoming Japanese fundamental releases will have little bearing on yield expectations. To discuss this and trading ideas join the USD/JPY forum.
FOMC Interest Rate Expectations
Fed funds futures continue to trend lower with markets pricing in a 31.1% chance of a rate hike by August. Tomorrow’s Non-farm payroll report could alter that if we see job growth greater than the 15,000 that is expected. However, prevailing concerns over sovereign debt is dimming the outlook for global growth which will weigh on yield expectations. Considering that there was a 54.9% chance of tightening beginning in June just a month ago, it would take a considerable amount of positive data to alter the dimming outlook, which favors dollar weakness.
Risk
The Dow tumbled on the day and is now threatening to test 10,000 once again, where it could find support from the monumental psychological level. A disappointing labor report tomorrow will only add to prevailing concerns and could send the blue chip index below support. Continued risk aversion opens the door for more USD/JPY losses. Conversely, positive job growth could be a catalyst for a retracement, especially if markets deem the current sell-off as overdone based on the level of risk. To discuss this and other fundamental data join the Economics Forum.
To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com
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