Talking Points
• Japanese Yen: Breaks 102.00
• Euro: Holds 154.00 as all eyes on NFP
• Pound: Above 2.01000
• Canadian dollar: Canadian employment on tap
• US Dollar: NFP holds the key
A typically quiet night of pre-NFP action with only the USDJPY making newsworthy moves as the pair broke the 102.00 figure knocking out one touch options at that barrier. After coming close several times during the night USDJPY finally traded below 102.00, the first time it has done so in more than 3 years.
Japanese officials remained muted in their comments about the latest bout of yen strength, with Finance Minister Nukaga only noting that policymakers were closely watching the FX markets without mentioning any specific levels. Still, Tokyo fiscal officials cannot be comfortable with the idea of USDJPY at 100 or worse below it. Exporters continue be the lifeblood of the Japanese economy and the current dynamic of unfavorable exchange rates and slowing global demand is sure to put a squeeze on their profits from both sides.
The question however is whether the BOJ will be able intervene effectively to stop the greenback’s slide against the yen. With Japan hosting the G-7 this year many analysts feel that the BOJ’s hands are tied diplomatically. Furthermore, it is not at all clear that intervention may work this time. The massive speculative unwind of the carry trade continues and given those flows the BOJ would have to spend an enormous amount of capital to stem the tide. Last time the BOJ expended nearly 250 Billion dollars to arrest the decline of the dollar. That trade actually became enormously profitable for the Japanese when the Fed began raising rates in 2005. This time however, the US monetary policy continues to call for further rate cuts. Whether Japanese officials will have the political willpower to expend enormous amounts of capital on what may turn out to be a losing cause, remains to be seen.
Meanwhile, the marquee event risk of the day in the currency market is the US NFP report. Wednesday’s ADP release suggested that we may see two consecutive months of job losses in the US labor market. Were this scenario to occur, dollar’s weakness could persist with EURUSD easily rallying to 1.5500. However, several analysts have suggested that because of the seasonality of the BLS birth/death model the numbers may produce a positive surprise as the Bureau of Labor Statistics makes adjustments for the creation of new businesses. Furthermore, it is also possible that last months numbers may be revised upward alleviating some of the gloom surrounding the buck. In either case, today’s NFP data could help settle the debate between dollar bulls who argue that the economy is merely in a slowdown and dollar bears who claim that it is already in a recession.
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To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: bschlossberg@fxcm.com
