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Risk FX Rallies as USD/JPY Tiptoes Near 100

Risk FX Rallies as USD/JPY Tiptoes Near 100

Boris Schlossberg, Technical Strategist

The euro, pound, and Aussie are trading higher while USDJPY is dangerously close to the key 100-level support, and today’s North American session will likely determine whether the level holds or gives way.

More liquidation in Japan’s Nikkei market has continued to put downside pressure on USDJPY during the first trading day of this week. The pair was inching towards the key 100.00 barrier throughout the late-Asian and early-European trading sessions as the Nikkei suffered another sharp selloff today, dropping 3.72% as the correction in Japanese stocks continued.

USDJPY held up well for most of the night, but as European trading came online, the selling pressure resumed, and USDJPY came within a few pips of tripping the 100.00 level.

We have been noting for the past several days that despite a torrent of supportive fundamental data from both the US and Japan, the pair has refused to rally further, indicating that it may have set a near-term top at 103.50 and may now enter a period correction and consolidation.

For now, the 100.00 barrier remains untouched as importer bids have propped up the pair, but if equity flows remain negative in today’s North American session, the temptation to run the 100.00 level will no doubt escalate, especially once we clear the 10 am NY option cut. Therefore, there is likely to be a lot of good two-way action in USDJPY once the North American markets open for trade.

AUD/USD Could Get a Boost This Week

Elsewhere, better economic data helped to boost high-beta currencies, and the euro (EUR), British pound (GBP), and Australian dollar (AUD) all posted gains against the US dollar (USD).

In Australia, the markets ignored weaker retail sales and ANZ job adverts data and instead focused on China's PMI data, which came out on Saturday and showed a rise to 50.8 from 49.9 expected.

As we've been saying for the past week, the Aussie has been so grossly oversold that some sort of rebound was due, and clearly, the .9500 level has found some longer-term bargain hunters and remains strong support for AUDUSD for the time being. If the short covering can extend through the .9700 level, it could trigger a stronger rally with the pair possibly rising towards .9800 as the week progresses.

Encouraging Signs from UK, Eurozone Data

In the UK, the PMI Manufacturing data surprised to the upside, rising to 51.3 from 50.3 expected. This was the second consecutive month of 50-plus readings, indicating that the UK manufacturing sector is starting to recover. The new orders index rose to 53.7 (a 26-month high). The news proved positive for GBPUSD, lifting the pair to a high of 1.5289 before easing a bit towards 1.5260.

In the Eurozone, the latest PMI data also showed an improvement. Although the headline readings remained below the 50 boom/bust line, they nevertheless rose to 48.3 from 47.8 with some of the periphery economies registering multi-month highs. That was encouraging for investors, and EURUSD rose above the 1.3000 level, trading at 1.3025 in morning European dealing.

Critical US Data to Watch Today

Whether the rally in high-beta currencies can continue for the rest of the day will depend on North American flows. The economic calendar carries the ISM manufacturing report, and the markets are looking for little change from the month prior.

Friday's strong Chicago PMI reading suggests that today’s ISM number could surprise to the upside, which could provide the greenback with some lift across the board. If the data misses, however, and worse, if it dips below the 50 line, it is extremely likely that USDJPY will drop beneath the 100 level on the news.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.