Recap : USDJPY at risk


Like most macro assets, the USDJPY cross has frustrated consensus this year. To some extent, this isn’t surprising. Going into the year, consensus narrative has been:

  • The BoJ will ease further as the Japanese economy is hit by the VAT hike
  • US yields will rise further as the economy strengthens and the Fed brings forward its hiking time table

Of course, neither of these happened.

  • Instead of even hinting of further easing, the BoJ has actually been notably more hawkish than expected. In the most recent minutes, several members were on record stating that they believed the output gap was closed. Which suggests that additional easing will require substantially worse data
  • Global yields of course, have confounded consensus expectations.

At this juncture, positioning is exposed, and patience is wearing thin.

  • CFTC data shows that speculators are short and represent over 40% of the open interest. While this is notably smaller than the 60% print in December, it remains on par with the records set in 2007.
  • Expectations for the next round of QE have gotten pushed out farther and farther. Much of the success of BoJ policies has been a result of the ‘shock and awe’ effects, which are wearing off. One sign of that – net equity flows (currency hedged or otherwise) have dropped off very sharply. Note also that a similar drop in 2004 preceded a 5 figure drop in the cross.

  • US yields, which were supposed to move higher and help the cross rally, have instead fallen and are near YTD lows.
  • The weekly chart looks quite weak. 101.3 is a long term support/resistance level that USDJPY has been pushing against all year in a descending triangle formation. Substantive support levels aren’t in play for another 5 figures or so. (But having said that, another interpretation is that the cross is just retesting the uptrend line that has extended back to early 2012)

Note that I’m not saying the long term USDJPY rally is over! Indeed, several plausible scenarios could see the cross substantially higher from here over the longer run. And the BoJ meeting on Tuesday night could certainly prove to be a positive surprise for the cross. But I imagine that this is a risk other participants have likely flagged, which suggests that over the next several weeks, the probability distribution may be skewed to the downside.

Also – this is a good post by Macro Man:


  • At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime –Reuters
  • GS on Financial Conditions:
  1. Financial conditions in the US are now the easiest they have been since the financial crisis. On the back of the move lower in government bond yields, tightening corporate credit spreads and weakening in the US Dollar Trade Weighted Index (TWI), US financial conditions have taken a fresh leg lower. That said, they were lower still in the 2005-2007 period of ample liquidity.
  2. Financial conditions have also eased in the Euro area, driven by the move lower in long rates and compression in spreads, but in this case they are still tighter than the levels that prevailed in late 2012 and early 2013.
  3. Financial conditions in Emerging markets are also easier than at any point in 2014…Easier conditions in China are an important part of this story, as policymakers have moved to support growth…overall, EM financial conditions are still markedly tighter relative to post-financial crisis lows

Der Spiegel reports that ECB Executive Board member Peter Praet favours a 10bp interest cut at the Governing Council’s next policy meeting, lowering the ECB’s MRO rate and deposit rate in parallel. A measure that encourages SME lending is also being considered.

Governor Carney highlighted risks to the UK recovery posed by the UK housing market. He noted that these risks stemmed partly from structural features including an undersupply of housing. Nonetheless, the Bank of England’s Financial Policy Committee, which next meets to discuss financial stability risks on June 17, could try to reinforce banks’ under-writing standards or banks’ capital adequacy.

Upcoming Data:

  • Mon: RBA Minutes
  • Tue: UK CPI, Japan Trade Balance,
  • Wed: BoJ, BoE Minutes, UK Retail Sales, Dudley Speaks, Yellen Speaks, Fed Minutes, EU Consumer Confidence, Japan PMI, China HSBC PMI
  • Thu: EU PMI, UK GDP, Turkey CBRT, Canada Retail Sales, US Jobless Claims, Existing Home Sales, South Africa SARB
  • Fri: German IFO, CanadaCPI, US New Home Sales