USD/JPY Shows Which Is Stronger - Risk Trends or Monetary Policy
- Risk trends and relative monetary policy are two of the most prominent and productive fundamental drivers
- The S&P 500 has guided a broad range of risk assets higher, but conviction has drawn skepticism
- Monetary policy is rebalancing rather than driving to new extremes
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There are two dominant themes in the FX market that trade influence depending on their fundamental activity: speculative appetite and relative monetary policy. We can look across the market at various assets and see how they are moving relative to each other as well as the fundamental catalysts that they respond most readily to in order to gauge the balance of power. Then again, we can just look to the USD/JPY. The pair is at the intersection of both fundamental themes, and its recent significant divergence from the S&P 500's march towards record highs speaks volumes of conviction.
When we look at the risk side of the market, there is certainly a broad push higher for the yield-oriented markets. Equities, emerging markets and commodities are just a few of the major asset classes that have risen in tandem; but momentum has tangibly lacked through the move. This is particularly true of the US equity benchmark where the proximity of record highs hasn't hastened bulls efforts to drive higher. The breadth without depth view of the sentiment push casts doubt.
As the USD/JPY - and other Yen crosses - head lower against the carry flow, we see the focus on monetary policy generating more traction. The weak Dollar is a factor given the downgraded rate forecasts heading into the June FOMC decision next week; but there that doesn't account for the general trend for all the Yen crosses. A rise in the Yen as doubt over the BoJ's ability to drive its currency down isn't an active driver - rather it's a passive recovery of premium. We are at an impasse. Conviction needs to arise for either sentiment or policy views. We discuss USD/JPY's position as a unique fundamental measure and its bearings in today's Strategy Video.
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