Tuesday's FX Roundup
- USD/JPY: 6 Reasons for the Big Sell-off
- AUD Soars 1% to Fresh 4-Month Highs
- CAD: Housing Data Raises Fresh Concerns
- NZD: Business Sentiment Remains Near 20 Year Highs
- GBP: Supported by Positive Surprise in Industrial Production
- EUR Extends Gains on ECB Speak and Dollar Weakness
- USD/JPY Crashes on BoJ Optimism
USD/JPY: 6 Reasons for the Big Sell-off
With no major U.S. economic reports scheduled for release Tuesday, the sharp sell-off in USD/JPY caught everyone by surprise especially as the currency pair experienced its largest one-day intraday decline in 8 months. The move took USD/JPY below 103 and 102 and has now put 101 in sight. Big moves can happen when they are least expected because confusion about what is driving the move can lead to further liquidation. In other words, USD/JPY sells off, traders search for a reason and when they can’t find a definitive one, they cash out on the concern that they are missing something that everyone else knows. Tuesday’s sell-off in USD/JPY was not caused by 1 but 6 distinct factors that combined together to make Tuesday one of the worst days for USD/JPY this year.
The initial selloff in USD/JPY occurred during the Asian trading session after Bank of Japan Governor Kuroda said no stimulus is needed at this time and the downside risks have diminished. By eliminating any near term possibility of easing, the Governor’s comments sent the Nikkei and USD/JPY sharply lower. The losses accelerated when FOMC voter Kocherlakota said the Federal Reserve is underperforming on both inflation and employment, which suggests he favors a slow, unwind of QE. 10-year bond yields turned lower causing USD/JPY to trip stops below 102 and 101.80. According to recent reports from the CFTC, speculators hold massive long USD/JPY exposure and Tuesday’s sell-off most certainly spooked some traders into squaring their positions. Reports of separatists seizing buildings and holding hostages in Ukraine gave investors another reason to bail out of USD/JPY.
Six Reasons For Tuesday's USD/JPY Significant Decline
1. Dovish Comments from FOMC Voter Kocherlakota – Says Fed Underperforming on both inflation and employment
2. 10-Year Bond Yields Hits Day’s Lows, Extends Slide
3. Nikkei 225 Futures Down 200 points
4. Stops Tripped Below 102 and 101.80
5. No Help from BoJ – Optimistic Comments from Kuroda Suggests Near Term Stimulus Unlikely
6. Fresh Tensions in Ukraine – Reports of Separatists Seizing Building and Holding Hostages
The burning question on everyone’s mind Tuesday is whether USD/JPY will continue to head lower. There is a significant zone of support between 101.60 and 100.75 and we wouldn’t be surprised to see the currency pair test the lower bound of this range. However Wednesday’s FOMC minutes should lend support to the greenback because if you recall Janet Yellen continued to taper in the month of March and at the time, she even talked about when rates could increase, which the market interpreted as bullish for the dollar.
AUD Soars 1% to Fresh 4-Month Highs
Unlike USD/JPY, AUD/USD traded extremely well Tuesday, rising approximately 1% to its strongest level in 4 months. The surge in the Australian dollar also caught investors by surprise after last night’s softer business confidence report. According to NAB, businesses grew less optimistic about the outlook for the economy due to a stubbornly high currency, uncertainty abroad and the potential for significant belt tightening in the upcoming budget. This may lead our readers to wonder what drove the AUD higher. The rally was fueled by U.S. dollar weakness, a rise commodity prices and renewed demand for higher yielding currencies. China could also announce a mini stimulus program any day and investors could be positioning ahead of this announcement. Having cleared 95 cents, there is no resistance in AUD/USD until 0.9450. The New Zealand dollar also traded sharply higher despite a 1-point decline in the NZIER Quarterly Business Opinion survey. The data posed very little risk to kiwi because it remains near its strongest level in 20 years. The Canadian dollar on the other hand experienced relatively shallow gains because of extremely weak housing market reports. Building permits dropped 11.6% while housing starts came in at 156.8k versus 192k expected. If this trend continues, the housing market could become a bigger headache for the central bank. New Zealand credit card spending numbers were scheduled for release Tuesday evening along with consumer confidence from Australia. While the momentum for AUD and NZD are skewed to the upside, a more significant sell-off in the U.S. dollar would be needed to drive these currencies even higher.
GBP: Supported by Positive Surprise in Industrial Production
The British pound also traded higher Tuesday but unlike the commodity currencies, the rally in sterling was supported by positive U.K. data and dollar weakness. Industrial production rose 0.9% in the month of February 3 times more than expected while manufacturing production rose 1.0%. While this failed to prevent IP growth from slowing on a year over year basis, manufacturing production grew at its strongest pace yoy since February 2011. This suggests that the manufacturing sector and the U.K. economy as a whole is not slowing as quickly as the PMI numbers suggest. The country’s trade balance is scheduled for release Wednesday and if the deficit improves as much as economists anticipate, GBP/USD could make a run for its 4-year high of 1.6822. The Bank of England meets later this week and even with Tuesday’s rise in industrial production, they are widely expected to keep monetary policy unchanged until there is evidence of stronger inflation.
EUR Extends Gains on ECB Speak and Dollar Weakness
Like all other major currencies, the euro traded higher against the U.S. dollar but it experienced the narrowest gains. There were no major Eurozone economic reports to support the move but recent comments from ECB officials helped to prevent a deeper slide in the currency while the sell-off in the dollar lifted the pair. Expect to hear more from the ECB Wednesday with Coeure and Lautenschlaeger scheduled to speak. While the central bank has made it clear that they could increase stimulus using conventional and unconventional measures, there is little urgency to do so. For the time being, we expect EUR/USD to take its cue from U.S. equities and the market’s appetite for the greenback.
USD/JPY Crashes on BoJ Optimism
The decline in U.S. 10-year bond yields and sell-off in Japanese stocks overnight drove USD/JPY sharply lower. All of the Japanese Yen crosses suffered as a result. The rally in the Yen was a direct response to the Bank of Japan’s monetary policy decision and more specifically, the comments from Governor Kuroda. The central bank decision to leave monetary policy unchanged was widely expected but investors were surprised by Kuroda’s nonchalant attitude about the potential for future easing. In addition to saying that easing is not required at this time, Kuroda also noted that the downside risks to the economy had diminished and that the labor market is tight and wages should rise following negotiations. This optimistic view reflects the central bank’s confidence in the economy’s ability to withstand the consumption tax increase. It also confirms that the BoJ plans to be reactive and not proactive with a slowdown in the economy. They want to save their ammunition for the most opportune time when they can get the most bang for the buck. This means that the BoJ will most likely keep policy unchanged when they meet again on April 30. We are still looking for the central bank to ease but that may not occur until the third quarter.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.