Japan’s intervention fears help USD

Movements in the USD were not consistent with the mid-week batch of US data released.

Japanese Trader
Source: Bloomberg

On the surface, the poor ADP employment data and slightly stronger than expected ISM non-manufacturing and factory orders muddled the US growth outlook. The logical reaction should be lower expectations of Fed moving on rates next month. However, USD continued to march steadily higher after the dollar index hit a 16-month low below 93.

Much of the move however, is due to the paring of long JPY positions. The Japanese yen surged to an 18-month high, after the Bank of Japan maintained policy last week, surprising most market participants. The JPY strength prompted Finance Minister Taro Aso to remark that such movements are “extremely concerning”.

Some investors probably feel that there is an increased possibility of government intervention as USD/JPY head towards the 105 mark, and therefore decided to take some of their JPY bids off the table. This helped USD to strengthen broadly.

Further USD up-move depends on how the market expectations will evolve around Fed policy. Should more Fed officials, particularly FOMC voters, start to sound more hawkish, the market would interpret it as preparation for a nearing rate hike, and react accordingly. As of now, market participants are still pricing a low probability of a June rate move, seen at 10% according to the Fed funds futures.

There was more pullback in oil prices as the US EIA report shown a larger than expected climb in US crude stockpiles, adding another 2.8 million barrels. Taken in conjunction with earlier reports that OPEC increased its production in April to an average of 33.2 million barrels a day, it is foolhardy to think that the supply glut issue is going away any time soon.

Given the weak leads from the European and US markets, and the pullback in oil prices, Asia is set for another risk-off session on Thursday. The Straits Times Index has been under significant pressure since mid-April, closing down for a straight eighth sessions yesterday, losing around 190 points, and 6.3%, since hitting a six-month high at 2964.1 on 21 April.

 

Yesterday: S&P 500 -0.59%; DJIA -0.56%; DAX -0.99%; FTSE -1.19%

 

*You may wish to follow me on twitter at https://twitter.com/BernardAw_IG

IGA, may distribute information/research produced by its respective foreign marketing partners within the IG Group of companies pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the research is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, IGA accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact IGA at 6390 5118 for matters arising from, or in connection with the information distributed.

This information/research prepared by IGA or IGA Group is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. In addition to the disclaimer above, the information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Any views and opinions expressed may be changed without an update.

See important Research Disclaimer.