There are three highlights to the foreign exchange market today. First, the yen is marginally softer. The yen’s strength this month has been the main development. After making a marginal new high yesterday, some semblance of stability emerged in North America yesterday, and this has carried over into today’s activity.
The yen’s surge may be easing. It made a new marginal high in Asia, but it was unsustainable. Technically, a hammer candlestick pattern may be traced out by the greenback’s recovery today.
Supporting the greenback is the movement in interest rate differentials. The US 10-year premium over Japan has widened by nearly 10 bp since last Thursday. Near 184 bp, it is the widest this month. The two-year premium has also widened at 96 bp. It is also the widest this month.
In an unusual development, sterling is outperforming today. It rose to a four-day high near $1.4230 on what appears to be mostly modest position adjustment in relatively subdued turnover. The $1.40 area held on repeated tests in the second half of last week. Stops were triggered above $1.4160 forcing latest shorts to cover. The news stream was not particularly helpful with the British Chamber of Commerce warning that the economy slowed in Q1 with the balance of services the poorest in nearly three years. Meanwhile, UK stocks and bonds are underperforming slight
Speculators in the futures market were not particularly active in Commitment of Traders reporting week ending April 5. There was only one gross position adjustment which we regard as significant (defined as a 10k contract change), and that was in the yen.
The yen’s surge in recent days has captured the attention of investors and policymakers alike. It is indeed unsettling and seems to run counter to the economic logic negative interest rates, which the BOJ surprised the market with at the end of January.
The main feature in the foreign exchange market continues to be the surge of the Japanese yen. A convincing explanation of the yen’s strength seems elusive. Until last week, which means through the fiscal year-end last month, Japanese fund managers have been buying foreign bonds at a near-record pace.
Foreign investors, for their part, have been dumping Japanese shares. The main buyers of the yen appeared to be speculators, wherein the futures markets, they have amassed a near record net and gross long yen position.
The old head and shoulders pattern in the dollar against the yen is back in vogue. We first pointed it out the first week in January here.
Recall the details. The neckline is drawn around JPY116.30 and measuring objective is near JPY107.00. That target also corresponds to a 38.2% retracement of the big Abe-inspired dollar rally (~JPY106.80). This Great Graphic from Bloomberg shows the pattern.
The US dollar is better bid today but remains largely in the ranges seen in recent days. There a few developments to note, which together are lifting European equities after Asian equities softened.
First, the API oil inventory estimate showed an unexpected fall of 4.3 mln barrels. An increase of half the magnitude was expected. The DOE estimate, which is considered more reliable, will be one of the North American highlights today.
Conspiracy theories have run amok. After several years of claiming countries were engaged in currency wars or attempts to drive their currencies down to achieve export advantage, many reporters and analysts announced a volte-face. At the late February G20 meeting in Shanghai, a secret accord has been concocted that declares a truce in this made up war.
This Great Graphic, created on Bloomberg, depicts the CRB Index, a basket of commodity prices. The technical picture has deteriorated, and the price action in the coming sessions is particularly important in determining outlook.
