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USD/JPY Taking Direction From Stocks, Is More Weakness Ahead?

USD/JPY Taking Direction From Stocks, Is More Weakness Ahead?

2010-05-19 20:30:00
John Rivera, Currency Analyst
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USD/JPY

The Yen is in the process of erasing its overnight gains as the hysteria over Germany’s ban on naked short selling fades. The Asian currency benefitted from concerns that the restriction was a reflection of the German’s government concerns that more underlining problems would emerge. European government spending will stall the region’s economy and weigh on global growth. The broad based risk aversion helped send the USD/JPY lower as the pair has seen its correlation with risk remain firm at 57% compared with 28% a month ago. As the prospect for a Fed rate hike has faded so has the influence of yield expectations of the dollar/yen’s direction. A dovish Fed and slowing inflation will only add to its insignificance.

 5-19-10PD-01

JPY Interest Rate Expectations

Overnight Index Swaps continue to reflect that markets expect the BoJ to remain on hold for at least the next year. The central bank is expected to outline a new loan program on Friday with the goal of encouraging private banks to lend more to industries with growth potential as part of its long-term approach to beating deflation. Declining price remains a concern and until price growth returns there is little chance of a rate hike. Discuss this and trading ideas join the USD/JPY forum.

 5-19-10PD-02

FOMC Interest Rate Expectations

Fed fund futures are pricing in a zero percent chance of a Fed rate hike in June and today’s consumer price index release for April and the FOMC minutes from their last policy meeting have added to the dimming prospects for tightening. The central bank continues to see existing slack in the economy weighing on inflation until 2012 which was validated by the decline in the pace of price growth to 2.2% from 2.3% with the core reading slowing to 0.9%. Although policy makers expect a “modest gain” in the labor market they maintain the view that it is unlikely the consumer will be a major factor for growth in 2010. A few members were calling for the beginning of selling assets but the majorities want to defer asset sales until after a rate rise. There is very little event risk until next month’s labor report that could significantly move yield expectations which could be a weighing factor for the greenback.

 5-19-10PD-03

Risk

A report showing that 14.01% of mortgage holders are behind in their payments cast a shadow over equity markets which will already jittery from Germany’s ban on naked short selling. Stocks tried to stage a late comeback but bulls couldn’t gain any traction as prevailing growth concerns have traders proceeding with caution. The upcoming Philly Fed manufacturing reading could be the next bearish catalyst for markets if it shows a sharp decline similar to the New York region, as it could stoke fears that the boost from the inventory cycle is ending. We could see support at 10,300 but a re-test of 10,000 may be inevitable given the dimming outlook. Discuss this and other fundamental data in the Economics Forum.

 5-19-10PD-04

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: instructor@dailyfx.com

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