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USD/JPY - Buy or Sell?

  • Kathy Lien
  • 9 October 2018

Daily FX Market Roundup 10.08.18

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

After driving USD/JPY to 11-month highs last week, investors took profits in what should have been a quiet trading day. However with US and Canadian markets closed, the thinner liquidity also created an opportunity for larger moves, which was what we saw in USD/JPY today. The selling began at the European open and gained momentum when those unlucky U.S. traders who had to work on Columbus Day joined the market. They took USD/JPY below 113 by lunchtime, which was the London close and only eased up when European traders left their desks. Today's sell-off took USD/JPY to the 20-day SMA, which is the first level of support. If USD/JPY holds 112.80 then its back towards 114 for the pair but if this level breaks, the sell could extend to 112.



Fundamentally, nothing has changed in the U.S. economy. This week's inflation reports are still expected to be strong and the Federal Reserve has one more rate hike this year. However the problems for China and Italy continue to grow, causing risk appetite to sour. Chinese stocks plunged 4% overnight, the Yuan weakened and the US Treasury added salt to the wound by expressing their concern about China's weakening currency, fueling speculation that they could label China a manipulator for the first time since 1994. With all of this in mind, we still think USD/JPY is headed above 115 and see today's move as the first opportunity to initiate longs.

EUR/USD remained under pressure on the back of weaker German industrial production. Economists were hoping that industrial production would rebound in August after falling sharply in July but instead it contracted for the third consecutive month. Despite positive and in some ways hawkish comments from ECB officials, we haven't seen consistent improvements in Eurozone data. Also, as reported by our colleague Boris Schlossberg, "the concerns over Italian budget crisis have investors in a frenzy despite reassurances by deputy PM Matteo Salvini that the government has no plans on leaving the euro. Italian yields spiked to 4.5% on the benchmark 10 year - a dynamic that is only likely to make it more difficult for the country to rebound from its economic rut. The rise in Italian yields is also likely to affect the ECB which just saw its balance sheet deteriorate markedly and if these flows persist it may have to postpone plans to commence the taper despite constant assurances to the contrary." Technically, EUR/USD is in a downtrend and needs to clear 1.1650 to preclude a moved down to 1.13.

Sterling on the other hand refuses to fall as investors hope for an agreement on the Irish border. This is an important week for the UK - not only will the latest trade balance, industrial production and monthly GDP report be released but EU Chief Negotiator Barnier is scheduled to formally present their "super charged" trade proposal on Wednesday. We'll have to see how the UK responds but if today's comments are a guide, then acceptance of their offer probably won't happen this week. According to a UK official, there are many big unresolved issues and if you recall last week, Prime Minister May made it clear that a no deal Brexit is still in the cards.

Despite the losses in China, the Australian and New Zealand dollars rebounded against the greenback while the Canadian dollar slipped back. No economic reports were released from any of these countries but AUD and NZD should have fallen on the back of the sell-off in Chinese equities. Instead their recovery tells us how deeply oversold these currencies are. However with the U.S. still targeting Chinese trade, we don't expect significant recoveries for AUD and NZD. The Canadian dollar on the other hand should rally with the market pricing in 100% chance of a rate hike by the Bank of Canada this month. The Hurricane brewing in the Gulf could also drive up oil prices, which would put additional pressure on the loonie.

 

 

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BKForex Advisors LLC will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on BKForex Advisors LLC. BKForex Advisors LLC do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

 

About the Author
Kathy Lien
Kathy Lien is Managing Director and Founding Partner of BKForex. Having graduated New York University’s Stern School of Business at the age of 18, Ms. Kathy Lien has more than 13 years of experience in the financial markets with a specific focus on currencies

Ms. Kathy Lien is Managing Director of FX Strategy for BK Asset Management and Co-Founder of BKForex.com. Her career started at JPMorgan Chase where she worked on the interbank FX trading desk making markets in foreign exchange and later in the cross markets proprietary trading group where she traded FX spot, options, interest rate derivatives, bonds, equities, and futures.

In 2003, Kathy joined FXCM and started DailyFX.com, a leading online foreign exchange research portal. As Chief Strategist, she managed a team of analysts dedicated to providing research and commentary on the foreign exchange market.

In 2008, Kathy joined Global Futures & Forex Ltd as Director of Currency Research where she provided research and analysis to clients and managed a global foreign exchange analysis team. As an expert on G20 currencies, Kathy is often quoted in the Wall Street Journal, Reuters, Bloomberg, Marketwatch, Associated Press, AAP, UK Telegraph, Sydney Morning Herald and other leading news publications.

She also appears regularly on CNBC’s US, Asia and Europe and on Sky Business. Kathy is an internationally published author of the bestselling book Day Trading and Swing Trading the Currency Market as well as The Little Book of Currency Trading and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game all published through Wiley. Kathy’s extensive experience in developing trading strategies using cross markets analysis and her edge in predicting economic surprises serve key components of BK’s analytic techniques.


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