Market Drivers March 9, 2018
Europe and Asia
GBP: UK Trade -12.8B vs. -12B
GBP: UK MP 2.7% vs. 2.8%
North America
USD: NFP 8:30
CAD: Employment 8:30
The news that North Korea was willing to meet with US for an initial round of talks that could ultimately lead to denuclearization of the Korean peninsula was welcomed by FX markets in Asian and early European trade sending USD/JPY towards the key 107.00 mark.
The surprising diplomatic break was a welcome relief from a barrage of protectionist news that kept the greenback underpinned for most of the week. After having held the 105.00 level for several days, USD/JPY appears to have established a swing bottom low and may be gearing for a sustainable rally that could take the pair back towards 110.00 figure.
Many of the factors that weighed on the pair are starting to ease. On the tariff front, Mr. Trump’s bark appears to have been much worse than his bite, and when the policy is finally enacted it may have more of a theatrical effect rather than an economic one. Given the exemptions to Canada and Mexico and the invitation for other countries to apply for exemptions as well, the policy may not be as exclusionary as it appeared at first. More importantly, it’s unlikely to invite a strong response from other trading partners, unless Mr. Trump ratchets up the rhetoric again and should ease the fears of trade war among investors.
On the monetary front, the Fed under Chairman Powell is clearly more hawkish in its path to normalization which will begin to favor the dollar on interest rate differentials as the FOMC hike cycle becomes routine.
This leaves only the macro front as the final factor in USD/JPY rally, Today’s NFP report should provide a crucial input to the market. As long as jobs data does not slip below the 150K level, the markets are likely to continue to price in the prospect of three Fed rate hikes. More importantly, if average wages (which are projected to rise to 2.8%) can actually broach the 3% year over year barrier, the response in FX is likely to be massive with USD/JPY taking out the 107.00 and possibly the 108.00 figure as traders will finally become convinced that the long-awaited reflation is here. Anything more modest should still provide some support for the pair, and only a shockingly low print could overturn today's rally and send USD/JPY back to a retest of 105.00.
Sentiment in FX has shifted and markets appear to finally be ready for a dollar rally.