USD/JPY Breaks Another Floor but its Motivation is Unstable
• Monetary policy will again be a headline theme this week with RBA and RBNZ, but it will continue to lack trend traction
• Risk trends remain disconnected but still pointing north as risk premium and dip opportunities drying up
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Though there was another round of healthy but concentrated volatility, it seems I didn't miss much in the second half of last week despite the high profile event risk. Heading into this new trading period, there is considerably fewer high-profile calendar events on tap; but that may work to focus markets on what can drive speculation to a lasting run and return the lost conviction behind the now-tentative trends. Monetary policy continues to lose its authority while growing trade disputes and manipulation claims position clear losers and winners.
Risk trends have surprisingly held up in this uncertain and accusatory environment. While US equity benchmarks like the S&P 500 are among the very few pushing record highs, global shares are advancing to multi-month and multi-year highs of their own. The riskier corners of the market continue to promote a leveraged exposure - either in size or theme. Appetite for markets with a theoretically unlimited payoff (like equities) continue to recede despite the bouyancy. There has been an almost constant string of weekly net capital outflows from US equity ETFs through the past 9 months while the run of small movement days has extended far beyond what most would have thought possible. Meanwhile, appetite for assets with extremely capped returns but similiarly scaled risks (short VIX trades) continues to boom.
This dichotomy of the big picture fundamental themes has drawn a spotlight on the unusual performance of USD/JPY and the other Yen crosses. Despite risk trends maintaining their uneasy climb, this benchmark pair and its peers have slipped through another round of support. Fresh motivation now seems to be coming through the shifting attention of US President Donald Trump to call out perceptions of Japan's efforts to afford unfair trade advantages. Given the G7's statement back in 2013 seemingly targeting Japan's competitive devaluation, there seems to be more traction to be found here than with the accusation leveled at Germany and Mexico recently. Though a prevailing fundamental theme, can these trade disputes sustain viable trades? What can we expect from the RBA and RBNZ rate decisions? Is Brexit still a capable Pound driver? We discuss these questions and more in today's Trading Video.
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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.