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Yellen Doesn't Add to Dollar's Lift, USD/JPY Stretched for BoJ

Yellen Doesn't Add to Dollar's Lift, USD/JPY Stretched for BoJ

John Kicklighter, Chief Strategist

Talking Points:

  • The curb on the Dollar's surge following last week's FOMC rate decision held to start this week despite Fed Chair Yellen's remarks
  • Both the most active and arguable most speculatively-stretched market in this liquidity stunted week are Yen crosses
  • A BoJ rate decision, Oil rollover jump at technical resistance and underappreciated New Zealand hawkish shift deserve traders' attention

See how retail traders are positioning in the majors using the DailyFX SSI readings on thesentiment page.

The Dollar was last week's enthusiastic top performer, but the benchmark has struggled to transition that performance through the weekend. However, one of the 'major' crosses looks poised to generate volatility at the drop of a speculative hat: USD/JPY. While this liquid pair isn't at the historical extreme of say a EUR/USD (at 14-year lows) or GBP/USD (near three decade lows), the ground covered over just the past two-and-a-half months reflects an exceptional capital flows. With a well-timed break around the open of October, these crosses are sporting one of the most impressive quarters of comparable benchmarks over the past few decades. The Yen crosses' current fourth quarter performance ranges from 7.0 percent versus the Euro up to 15.5 percent for USD/JPY. Yet, this momentum has little to do with the Bank of Japan (BoJ).

Over the past five years, the Japanese currency has experienced an extraordinary amount of volatility and momentum - and much of it could be directly attributed to the local central bank. In the second half of 2012, the BoJ and Government announced a comprehensive plan to charge growth and target a permanent return of inflation. Warning that a massive stimulus effort was on the way was enough to motivate traders to adjust to the speculative chase and currency depreciation that had become common place at that time. In the past few years, that effectiveness has diminished to the point of being virtually unrecognizable in the regular channels of the financial system's response. For USD/JPY and its counterparts, the critical driver to watch now is speculative appetites. It was hunger for high-return, high-beta exposure that lifted benchmarks like the S&P 500 that helped lift the relatively discounted carry pairs. Yet, now the speculative advantage is diminished as liquidity thins. If sentiment stumbles, those assets taken for short-term appetite will be the most aggressively pared.

Looking ahead, the docket holds a few noteworthy pieces of event risk that may even tap into noteworthy themes. However, it remains an uphill battle to drive trends when holiday trading conditions are fast approaching. Beyond the BoJ rate decision (the last major central bank deliberation for 2016), we will also have a weigh in on Brexit and Fed forecasts for 2017 this week. UK Prime Minister Theresa May will be return to Parliament to speak to a panel on Brexit after Monday's session. Refusing to write off payment for access to the EU's Single Market seems to buffer the 'hard Brexit' scenario, but does little to show unity on the UK's approach to the negotiations. Meanwhile, where Yellen's optimism over the US jobs market in her remarks Monday failed to lift the Dollar further into its rally, Thursday's PCE deflator may make a late-in-the-day bid as the central bank's favored inflation report. Also worth noting for global traders is the jump in oil on contract roll and an underappreciated forecast for rate a 2017 rate hike from...the RBNZ. We discuss this and more in today's Trading Video.

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