USD Down, CHF Up. Yen, BoJ Under Pressure – Asia Market Open

2018-07-30 23:00:00

Daniel Dubrovsky, Contributing Senior Strategist

What's on this page

US Session Developments – S&P 500, NASDAQ Composite, US Treasury
A Look Ahead – Bank of Japan, Yen
Five Things Traders are Reading:

See our 3Q forecasts for the US Dollar, Yen and Equities in the DailyFX Trading Guides page

US Session Developments – S&P 500, NASDAQ Composite, US Treasury

A retreat on global benchmark indexes during Monday’s US trading session saw the S&P 500 slip about 0.6%. Worries stemming from a slew of poor performing earnings data out of Facebook, Twitter and Intel Inc. last week carried over into this with the tech-focused Nasdaq Composite falling 1.4%. In addition, markets are facing tightening credit conditions out of the US with the Fed rate decision due this week.

The retreat in sentiment also saw the US Dollar fall alongside steep declines in local treasury yields. This allowed alternatively high-yielding currencies like the Australian and New Zealand Dollars to appreciate at the expense of their US counterpart. Meanwhile, the anti-risk Swiss Franc and to a lesser extent the Japanese Yen (which faces the BoJ next) gained.

However, this trading dynamic somewhat reversed course during the end of Monday’s session where the US Treasury announced that more borrowing will need to be done during the second half of this year than anticipated. This is expected to amount to $769b. In fact, this estimate would be the largest amount needed since the financial crisis.

The Treasury noted that more borrowing is needed amidst the passage of Donald Trump’s $1.5b tax cuts and the $300b spending increase approved by Congress. US 10-year government bond yields soared amidst the anticipated increase in debt supply and the greenback pared some of its losses. Expect details outlining the source of funding on Wednesday.

A Look Ahead – Bank of Japan, Yen

All eyes will be on a highly anticipated Bank of Japan monetary policy announcement amidst increased speculation that the central bank may tweak some settings. The central bank's extraordinary stimulus program coupled with yield curve control has been squeezing commercial bank profit margins given the low rates of domestic return.

This speculation has been driven by gains in local 10-year government bond yields which rose above 0.1% over the past couple of trading sessions. In both cases, the central bank stepped in with an unlimited amount of bond purchases. With that in mind, the Japanese Yen could be muted until this event passes given its close proximity.

The risk here for the Yen will be if the BoJ does nothing and unwinds speculation of policy adjustment bets. Perhaps Governor Haruhiko Kuroda will use this as an opportunity to lay out some forward guidance to gauge the market reaction. Either way, the central bank is facing pressure of rising global lending costs, now compounded by the threat of more US borrowing.

With that in mind, upcoming Japanese jobless data will most likely cross the wires without much notice. The declines in equities also present the risk of being echoed in Asia/Pacific shares. That may fuel anti-risk currencies like the Swiss Franc. Meanwhile, the sentiment-linked Australian and New Zealand Dollars could depreciate.

Join our Japanese Jobless Data Webinar for live coverage and a preview of what to expect for the Yen ahead!

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IG Client Sentiment Index Chart of the Day: USD/JPY

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Retail trader data shows 58.6% of USD/JPY traders are net-long with the ratio of traders long to short at 1.42 to 1. The number of traders net-long is 0.1% lower than yesterday and 41.4% higher from last week, while the number of traders net-short is 11.8% lower than yesterday and 13.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USD/JPY-bearish contrarian trading bias.