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US Dollar Firms Against Japanese Yen as Trade Balance Improves

US Dollar Firms Against Japanese Yen as Trade Balance Improves

Christopher Vecchio, CFA, Senior Strategist

THE TAKEAWAY: US Trade Balance (MAY) > +3.8% to -$48.7B from -$50.6B > USDJPY BULLISH

The US Trade Balance improved in May despite a stronger US Dollar over the course of the month, perhaps a sign that domestic demand is strengthening. The deficit fell by 3.8% to $48.7 billion from $50.6 billion as Imports declined to their lowest level in three-months. Similarly, Exports jumped to their second highest month on record. This bode wells for the US economy: even though the Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) appreciated by 4.25% in May, demand for US products – from domestic and foreign consumers alike – was strong. This implies that the US has a competitive edge as concerns out of Europe grow.

USDJPY 1-minute Chart: July 11, 2012

US_Dollar_Firms_Against_Japanese_Yen_as_Trade_Balance_Improves_body_Picture_1.png, US Dollar Firms Against Japanese Yen as Trade Balance Improves

Charts Created using Marketscope – Prepared by Christopher Vecchio

In the wake of the release, the market reaction was tepid at best, with the only noticeable reaction coming in the USDJPY. The USDJPY, which had been falling all day, bottomed at 79.13 ahead of the release and traded as high as 79.23 within the hour afterwards.

Ahead of the Federal Reserve’s Minutes from its June 19 to 20 meeting, we expect the USDJPY to remain volatile. If the Minutes indicate that another round of quantitative easing is likely, the USDJPY will fall; if it’s evident that QE3 is not an immediate option, the USDJPY should easily retrace its losses today and trade up towards 80.00.

--- Written by Christopher Vecchio, Currency Analyst

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