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USD/JPY May Come Under Pressure As Stocks Find Resistance

USD/JPY May Come Under Pressure As Stocks Find Resistance

2010-05-26 19:40:00
John Rivera, Currency Analyst
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USD/JPY

The USD/JPY spent most the day trading in a narrow range as markets have lacked conviction following yesterday’s sharp reversal in equity markets but has come back under pressure as stocks give up gains. The pair has become a proxy for risk appetite which is evidenced by its strengthening correlation with equity markets which has risen to 65% from 31% a month ago. A strong U.S. new home sales report and a more upbeat outlook for the global economy from the OECD have helped ease concerns over the broader impact of the debt issues in Europe leading to earlier support. Meanwhile, the BoJ is expecting deflationary conditions until mid-2011 which will keep them on hold for the foreseeable future, making Japanese interest rate expectations strengthening correlation with the pair more spurious than explanatory. Dimming yield expectations for the U.S. have made them irrelevant in determining direction for the dollar/yen leaving risk trends as the main driver of price action.

PD-10-05-26-01

BoJ Interest Rate Expectations

The Bank of Japan board members are already debating the limitations and the potential issues surrounding their latest lending program. The bank said last week it will provide one-year loans at the same rate as the 0.1 percent key overnight lending rate to encourage lending to companies with growth prospects. The fact that the central bank is still looking for new ways to battle deflation leaves a zero chance that they would consider raising rates any time in the next year which is reflected in overnight index swaps. Discuss this and trading ideas join the USD/JPY forum.

PD-10-05-26-02

FOMC Interest Rate Expectations

Stronger than expected new home sales and durable goods orders failed to raise the outlook for U.S. interest rates furthering the argument that the central bank will remain on hold until 2011. Despite, the improvement in the headline reading for demand of long lasting goods, a 228% increase in nondefense aircrafts masked broader weakness. The core reading slipped 1.0% as demand for machinery fell 5.9% which could be a sign that the boost from the inventory cycle id beginning to fade. If businesses are reducing their investments in capital goods it is safe to assume that they will limit future hiring as well. The odds that the FOMC will raise rates have fallen with markets only pricing in a 21.1% chance of a hike by November.

PD-10-05-26-03

Risk

Stocks got off to a solid start on the back of a strong new home sales report but have started to see earlier gains disappear as broader concerns continue to weigh. Tomorrow’s U.S. GDP report and initial jobless claims could lead to a return of bullish sentiment if they point toward a strengthening recovery. However, we saw trend lien resistance hold today and that could lead to a continuation of the current bearish trend, especially if the fundamental data disappoints. Discuss this and other fundamental data in the Economics Forum.

PD-10-05-26-04

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

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