Why the Best USD/JPY Trade Is No Trade at All
The Japanese yen (JPY) traded lower against all major currencies except the euro (EUR) and Swiss franc (CHF) on Tuesday. The decline in US Treasury yields contributed to the weakness in USDJPY, but softer Japanese data also pushed the Nikkei down 2.63%, adding pressure to the yen crosses.
Nationwide department store sales dropped 2.5% year-over-year for the month of July, and softer spending was also seen at convenience stores in Japan and department stores in Tokyo. The decline in demand is not alarming, however, because part of it is a payback after last month's sharp rise.
The all-industry activity index also declined -0.6% in June after rising 1.2% the previous month. While the volume of trades in the Nikkei has been low, the fact that the yen has refused to decline despite a widening gap between US and Japanese interest rates is weighing heavily on sentiment in Japan.
It has been a challenge to remain bullish USDJPY, but fundamentals continue to support a rally. At this stage, it may be better to wait for some upside momentum before executing a trade, however, as there is quite a bit of resistance between 98 and 99 in USDJPY.
The Key UK Economic Data for Thursday
The British pound (GBP) hit a two-month high against the US dollar (USD) and snapped a nine-day losing streak to end Tuesday higher against the euro. No UK economic reports were released, but recent upside surprises in UK data continue to lend support to the currency.
The markets are pricing in an earlier rate hike by the Bank of England (BoE) monetary policy committee, which means they expect the central bank to reach its unemployment-rate target sooner. Before last week's data surprises, investors expected the first rate hike to occur at the end of 2016, but now tightening could happen as early as February 2015. While this is still a long time from now, the dramatic shift in expectations is part of the reason why sterling has performed so well this month.
Wednesday's public sector finances report isn't expected to pose a threat to monetary policy expectations. Public sector net borrowing is actually expected to decline in the month of July thanks to stronger growth and spending cuts. This would represent an improvement in Britain's budget.
The number we are more interested in, however, is the factory orders index from the Confederation of British Industry. We believe that this data has a good correlation with the more-closely-followed manufacturing PMI report because it measures the same sector. Economists are looking for an improvement, and if the increase is large enough, it could drive the GBPUSD to its June high of 1.5750.
By Kathy Lien of BK Asset Management
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.