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Yen Soars vs. Major Currencies, US Dollar Back on the Defensive

Yen Soars vs. Major Currencies, US Dollar Back on the Defensive

2016-04-07 07:25:00
Ilya Spivak, Sr. Currency Strategist
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Talking Points:

  • Japanese Yen soars vs. major currencies financing costs jump again
  • US Dollar back on the defensive after March FOMC meeting minutes
  • Fed may be setting the stage for June hike despite market skepticism

The Japanese Yen outperformed in overnight trade, rising to the highest level since August 2013 against its major counterparts. The move played out against the backdrop of another sharp jump in forward rates. Furthermore, the currency’s gains were mirrored in a drop in benchmark Japanese government bond futures, implying an increase in the cost of JPY-denominated financing. In fact, the implied carry return on ownership of most major currencies funded in terms of the Japanese unit has steeply declined.

Meanwhile, the US Dollar declined against all of its top counterparts. The move seems to follow from traders’ interpretation of minutes from the March FOMC meeting. The greenback initially rallied as policymakers signaled that several participants favored tightening last month, the move fizzled into the end of the North American session and appears to be gathering steam in the opposite direction in Asian trade. This may reflect the re-establishment of anti-USD bets unwound ahead of the announcement after a clear-cut hawkish surprise did not emerge.

Looking beyond near-term volatility however, the Minutes document may ultimately prove to set the stage for a June rate hike, and ultimately a stronger Dollar. As we suspected, the Fed used the release to signal that external headwinds – while worrisome – remain a possible rather than realized threat to the policy outlook. Officials agreed that the US has been resilient amid global instability and expected the economy to continue to expand despite the presence of cross-border risks.

This seems crucial to re-establishing the causal link between US economic news-flow and the priced-in policy outlook. Inasmuch as data outcomes have increasingly firmed relative to consensus forecasts over the past two months, that has scope to realign official and market-based rate hike bets by the next “big-splash” FOMC meeting in June. This would allow the central bank to hike with relative impunity, without worrying about triggering another round of counter-productive risk aversion akin to the aftermath of December’s rate increase.

Where will the markets go in the second quarter? See our forecast here!

Asia Session

GMT

CCY

EVENT

ACT

EXP

PREV

22:00

NZD

ANZ Truckometer Heavy (MoM) (MAR)

2.5%

-

1.7%

22:30

USD

Fed's Bullard Speaks in St. Louis

-

-

-

23:30

AUD

AiG Perf of Construction Index (MAR)

45.2

-

46.1

23:50

JPY

Official Reserve Assets ($) (MAR)

1262.1b

-

1254.1b

00:00

USD

Fed's Kaplan Speaks in Dallas

-

-

-

00:00

NZD

RBNZ Deputy Governor Bascand Speech

-

-

-

00:30

JPY

BOJ's Kuroda Speaks at Branch Mgr's Meeting

-

-

-

02:00

JPY

Tokyo Avg Office Vacancies (MAR)

4.34

-

4.04

06:30

AUD

Foreign Reserves (A$) (MAR)

64.3b

-

61.2b

European Session

GMT

CCY

EVENT

EXP

PREV

IMPACT

06:30

EUR

ECB and Its Watchers Conference

-

-

Low

06:45

EUR

French Trade Balance (FEB)

-3700m

-3712m

Low

06:45

EUR

French Current Account Balance (FEB)

-

-1.4b

Low

07:00

CHF

Foreign Currency Reserves (MAR)

-

571.1b

Low

07:00

EUR

ECB’s Constancio Speaks at Parliament Cmte.

-

-

Low

07:30

GBP

Halifax House Prices (MoM) (MAR)

0.9%

-1.4%

Low

07:30

GBP

Halifax House Price (3M/Year) (MAR)

9.5%

9.7%

Low

08:30

GBP

Unit Labor Costs (YoY) (4Q)

1.9%

1.9%

Low

11:30

EUR

ECB Publishes March Meeting Minutes

-

-

Medium

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.1176

1.1281

1.1340

1.1386

1.1445

1.1491

1.1596

GBP/USD

1.3770

1.3935

1.4029

1.4100

1.4194

1.4265

1.4430

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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