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Dollar Drops To Monthly Lows On Weak Inflation Data Aftermath

Dollar Drops To Monthly Lows On Weak Inflation Data Aftermath

Tyler Yell, CMT, Currency Strategist

Talking Points:

What do retail traders’ buy/sell decisions hint about the strong JPY trend? Find out here !

Regardless of the market you trade, chances are it has been severely affected by the wild ride in the US 10Yr. Treasury Yield in recent weeks. The positive correlation in the UST 10Yr Yield is rather significant whether you look at USD/JPY, Crude Oil, or major equity indices like the German Dax. The inverse correlation, meaning a move lower in the 10yr correlates to a move higher in the dependent asset, has recently hit a high mark in Gold.

As you can imagine, the yield moves lower (as the price moves higher) much like USD/JPY when there is a rush for money into haven assets. What’s important to note is that much of the ~100% rise in the yield, which aligned with the rise in markets, commodities, and some currency pairs were predicated on the back of the Trump effect leading to high growth and inflation. The prevailing market theme was that this inflation would induce pressure on the Federal Reserve to possible hike rates more aggressively than originally forecasted.

Much of the weakness in yields that has also brought down the USD is the weak US data on Friday with a soft CPI & Retail Sales (ex-Auto).

As you can see on today’s top chart, it appears that a breakdown could be developing in the 10-yr yield that could take us down back toward 2% or possible toward 1.50% where we bottomed last summer. The correlations would favor that lower yields would bring about a weaker dollar, which could boost some commodities

Closing Bell’s Top Chart: April 17, 2017: TNX (US Treasury Ten-Year Yield)

Tomorrow’s Main Event:

Bilateral Trade framework and economic dialogue guided by US Vice President Mike Pence and Japanese Deputy Prime Minister Taro Aso, scheduledfor Apr 18 is Tuesday's top event. The risk of further JPY appreciation is mainly on whether the topic of conversation turns to overly weak JPY and BoJ monetary policy stance. VP Pence unlikely to spark confrontation in the first meeting.

IG Trader Sentiment Highlight: USD/JPY Bulls Keep Believing In Upside. Should They?

USDJPY: Retail trader data shows 72.0% of traders are net-long with the ratio of traders long to short at 2.57 to 1. In fact, traders have remained net-long since Jan 09 when USDJPY traded near 117.525; price has moved 7.4% lower since then. The number of traders net-long is 3.2% higher than yesterday and 10.1% higher from last week, while the number of traders net-short is 8.8% higher than yesterday and 4.4% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USDJPY trading bias.(Emphasis Mine)

Contact and discuss markets with Tyler on Twitter: @ForexYell

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