Turning point for USD and JPY

I feel we are at a turning point for both the USD and JPY, although for very different reasons. 

On the USD side it seems likely that as long as US economic data holds up and improves, with the economy firing up again after the poor weather through Q4 of 2013, then we should see the Fed wrap up its bond buying program around October or November. From here the Fed will likely challenge the BoE to be the first major developed central bank to hike rates and this Friday’s payrolls report could really be key for the near-term direction of the USD.

Watch price action in USD/JPY and the USD in general going into Friday’s release, as they could give a good indication around market psychology and positioning more broadly. The market expects a print of around 200,000 jobs; a number above these expectations could set the USD on a strengthening trend.

On the JPY side, the BoJ would have to be disappointed by today’s TANKAN report. This report surveys a diverse range of businesses and will look at current and future operating outlooks. Certainly the ‘outlook’ survey is key as it takes into consideration the 3% point rise in the Japanese consumption tax, which went live today. The fact that the outlook for both large and small business missed expectations will not be taken well by the BoJ; while many would say logic has prevailed here (consumers usually don’t like tax hikes), this pullback shows a lack of belief that loose monetary policy can offset this.

You can also look at the 0.1% increase in planned capex and this is hardly a strong figure either. All in all the stage has been set for additional easing from the BoJ, and this should keep the JPY weak. Also, it’s worth pointing out that given USD/JPY has been trading in a 101.50 to 103 range for a while, the lack of JPY weakness will have a limited effect on imported inflation and thus we could actually see downside pressures over the coming months.

So given my view on the USD and also the prospect for further action from the BoJ, the evolving policy divergence should see the pair higher over the coming months and I see pullbacks to 102.60 as good entry points for long positions.


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