This is a very busy week for the foreign exchange market and currencies are on the move. For the past 2 months, USD/JPY has been trading in a tight range and is prime for a breakout. Between the Japanese government’s sales tax hike, the Tankan report, U.S. ISMs and non-farm payrolls, there are no shortages of catalysts for a big move in USD/JPY. Although manufacturing activity in the Chicago region slowed in March, the impact on USD/JPY was limited because manufacturing activity accelerated in the NY and Philadelphia regions this month.
Investors have also taken Fed Chair Janet Yellen’s dovish comments in stride this morning because even as she says the Fed is short of reaching its employment and inflation goals, she is still committed to tapering asset purchases at each successive meeting. With U.S. rates headed higher, it is time for some upside momentum in USD/JPY. We believe that most of this week’s U.S. economic reports will show a continued recovery in the U.S. economy, providing the perfect backdrop for a rally in USD/JPY.
The following chart shows how closely the pair has been tracking U.S. rates and that if the 10-year yields hit 2.8%, USD/JPY should be trading above 104.
USD/JPY is also performing well on the eve of the Japanese government’s first sales tax hike in 17 years. According to chart below, USD/JPY rallied more than 4% the month that taxes were raised because economic data did not take a turn for the worse until the following month. There’s a good chance the currency pair will behave the same way this time, taking out 104 especially if U.S. labor data surprises to the upside. For more on How the Tax Hike Could Impact USD/JPY in the long run, read our Special Report.
Kathy Lien, Managing Director of FX Strategy for BK Asset Management.