USDJPY Slips On A Report Of Fed's QT Pause But Recovered On Another Report Of US

USDJPY was trading around 109.59 in the early US session Friday, ticked down -0.03%, but slips from the earlier session high of 109.95 to a low of 109.52 on a report that the Fed may apply the brake on its QT (B/S tapering) earlier than expected. But it again recovered in a wild day of swing to almost the session high on another report that the US government (Trump) has reached a shutdown deal, whereby the government will open temporarily (for 2/3-weeks). Trump is expected to endorse a short-term bill to reopen the government (CR).

The report also suggested that border security debate will continue, but stop-gap funding bill would assure Federal workers of pay (as they have missed their 2nd paycheck) amid increasing stress on government systems and falling popularity of Trump. The US Senator Kaine also said lawmakers on the path to shutdown breakthrough.

Earlier USDJPY was boosted by renewed hopes of US-China trade truce as a Chinese trade group including deputy ministers will arrive in Washington on Monday to pave the way for the next round of trade talks between Vice Premier Liu He and the USTR Lighthizer and Treasury Secretary Mnuchin from Jan. 30 to 31. China’s central bank governor Gang could also join the talks.

But USD came under stress; Dow soared on hopes of dovish Fed; Gold, EUR, GBP and commodity currencies soared after the report of earlier than expected end of Fed’s QT (Quantitative Tightening). Again overall reaction in USDJPY was quite limited amid “risk-on” sentiment as Dow soared almost +300 points on hopes of Fed pause in the QT and further progress of US-China trade truce as the “stalled preparatory trade meeting” will resume on Monday.

As per Fed’s QT pause report: “Fed officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight. Officials are still resolving details of their strategy and how to communicate it to the public, according to their recent public comments and interviews. With interest rate increases on hold, for now, planning for the bond portfolio could take center stage at a two-day meeting in January. Fed officials weigh earlier-than-expected end to bond portfolio runoff and next week’s meeting could yield more clues”.

As a pointer, Trump is dead against this QT and said earlier: "stop with the 50 Bs" as the QT is the primary cause of liquidity (USD) shortage in the system, subsequent financial tightening and the plunge in the stock market, unlike the QE, which boosted stocks after the 2008 GFC.

The market as-well-as the Fed is expecting that the QT will go on in the auto-pilot mode till 2020-21 until Fed’s B/S size reduce from $4.5T to around $2.5T, a size which is much lower post-GFC, but also much higher pre-GFC. But the report suggested the Fed now expects the runoff (tapering) to end much sooner, although many Fed policymakers still "don't understand why the market has placed so much emphasis on the balance sheet lately." When George, a known Fed hawk surprised markets by calling for a pause on rate hikes, she also added that it's "unclear" whether the balance sheet shrinkage had accomplished much in the way of removing accommodation.

The report also noted that regardless of where the runoff ends, Logan, one of the officials responsible for managing the portfolio and an executive at the NY Fed, said in a speech last May that she saw "virtually no chance of going back to the pre-crisis balance sheet size, which of course is logical: by 2020 there will be roughly $2T in currency in circulation (and rising) which will be the new floor of the Fed's balance sheet. Ultimately, the Fed hopes to dump practically all of the MBS it accumulated during QE and shift toward a portfolio consisting almost exclusively of Treasuries. The conversation is really about the relative amount of reserves”.

Overall, this may be another “trial balloon” on the part of the Fed to test market reaction as-well-as Trump’s. The report also suggested that nothing is certain yet, as Kansas City Fed President George in a Jan 15 interview said: "A lot of the heavy lifting has been done. We’re waiting for the committee to be satisfied that they have reached sufficient understanding of what all the moving pieces are”.

All eyes will be now on Fed’s statement and Powell’s Q&A on 30th January-whether the Fed will bend to market & Trump pressure or act as an independent responsible central bank?

Technical view: USDJPY

Technically, whatever may be the narrative, USDJPY now has to sustain over 109.30 for a further rally to 110.00*/110.50-111.10/111.35* and 111.55/112.10-112.85/113.70* in the near term (under bullish case scenario).

On the flip side, sustaining below 109.00, USDJPY may fall to 108.50*/108.00-107.80*/107.15 and 106.60*/105.60-104.60*/103.70 in the near term (under bear case scenario).

Pivot: 109.3 Support: 108.5 108 107.8 Resistance: 110 110.5 111.1 Scenario 1: STRONG ABOVE 109.30 AND SUSTAINING ABOVE 110.00*/110.50-111.10/111.35*, USDJPY MAY FURTHER SURGE TO 111.55/112.10-112.85/113.70* IN THE NEAR TERM Scenario 2: WEAK BELOW 109.00 AND SUSTAINING BELOW 108.50*/108.00-107.75/107.15, USDJPY MAY FURTHER PLUNGE TO 106.60*/105.60-104.60*/103.70 IN THE NEAR TERM Comment: NEAR TERM RANGE: 107.75-111.35