USDJPY Is the Ideal Scale Between Monetary Policy and Risk Trends

Talking Points:

• These past weeks have seen dramatic changes in monetary policy forecasts, and subsequently large FX moves

• With hawkish Fed remarks and strong NFPs, the US seems on pace to finally change tack on a long dovish policy

• USDJPY may prove the best instrument to gauge when monetary policy's influence wanes and risk falters

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound and Gold on the DailyFX Trading Guides page.

As the Dollar soars in the afterglow of October's NFPs, it is important to remember the precarious structure of risk appetite that has been built upon a foundation of central bank support. Confidence and speculative positioning have been persistent qualities for the financial system since the Great Financial Crisis came to an end, but its origin is directly drawn from the exceptional and ultimately limited support offered by the world's largest monetary regulators. When does their influence reach its apogee? Will it be a cap in return, the rise of a threat or a withdrawal from one of the major players that finally forces speculative appetite to find balance? Various markets are already starting to dim in the uncertainty, but a favored benchmark in the S&P 500 has yet to capitulate. While the equity index will prove a good signal for the flip, there may be a better measure in the USDJPY. With a unique exposure to the speculative appetite for yield and the bare exposure to risk through carry, this should be a barometer for those in any market. We discuss risk and the USDJPY's ability to measure it in this weekend Strategy Video.

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