USD soars on quadruple data surprise

<p>If Friday’s release of US April CPI showing core inflation at an unexpected two-year high was an aberration, then today’s quadruple upside surprise in US […]</p>

If Friday’s release of US April CPI showing core inflation at an unexpected two-year high was an aberration, then today’s quadruple upside surprise in US data was no exception. Durable goods orders, new home sales, S&P/Schiller house prices and consumer confidence all surprised to the upside today, further pushing USDJPY to fresh seven-year highs, while knocking down all currencies against greenback.

The 1.0% jump in durable goods –excluding defence orders—contributes towards a vital advance in April equipment spending and the calculation of Q2 GDP, especially as Thursday’s final release of Q1 GDP is seen revised to -1.0%.

The holiday shortened week will not be short of reasons to re-enter USD longs, especially as rising bond yields make the case for prioritising the greenback in the list of yen crosses.

By next week, markets will ask the question that was asked in mid- March: Why are yields low despite brighter growth outlook?

By next week, markets will ask the question that was asked in mid- March: Why are yields low despite brighter growth outlook?

Why USD/JPY has soared 

Aside from the better than expected US figures, the main reason to the latest rally in USD/JPY is the latest report from the IMF on Japan calling for for further easing. The IMF said:

“The BoJ needs to stand ready for further easing, provide stronger guidance to markets through enhanced communication, and put greater emphasis on achieving the 2 percent inflation target in a stable manner:  Additional easing: Reflecting the weak and delayed transmission, further easing should take the form of increased asset purchases and lengthening their duration”.

This means the Bank of Japan will most likely step up its monthly asset purchases in September or October.  Unlike other central banks, which have been pressured for pursuing a quasi beggar-thy-neigbour currency policy, the Bank of Japan continues to get special treatment due to its exceptionally deflation-prone demographic conditions. 125 in USD/JPY is increasingly becoming reality.

Tsipras leans to Government reshuffle

The extended divergence between improvement in Eurozone macro dynamics and conflicting signals from Greece public officials has kept the euro relatively supported until a new batch of US inflation data began to drag on the single currency.

As Greece faces its next four payments to the IMF, totalling €1.6 bn by end of June, it is increasingly finding itself in the position of having to choose between declaring an outright default on its bailout program and making U-turns on its election promises, which implies a breakdown of the current government.

A government reshuffle in Athens is seen as the most likely oucome, in which case would unleash the departure of several radical members and force lead Tsipras to change Syriza’s coalition party. A government reshuffle would help avoid the uncertainty associated with a referendum (on Greece Eurozone exit) or snap elections and pave the way for the “new” government to pass resolution on pension reforms, thereby allowing Greece to return to final agreement before payments are due by end of June.

Euro bears may find fertile ground in the event of a referendum as the environment will be exacerbated by capital controls on bank withdrawals and transfers. Such a situation would combine the euro gloom of the May 2012 elections with that of Cypriot depositors’ exodus in July 2013.

The impact of any positives from stabilisation in Greece risks on the euro will likely be absorbed by a gradual improvement in US data, further building the case for an autumn rate hike. But once markets absorb the notion that any Fed hike this year would be all but a tightening of conditions, the case for buying the euro dips is more alluring than chasing the lows.

USDJPY Monthly May 26 2015

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.