USDJPY Breaks 110, EUR Below 1.13 – What’s Next?

The US dollar is on fire. Investors drove the greenback higher against all of the major currencies in a move that took the euro, Japanese yen and Swiss Franc to their lowest levels this year. USD/JPY is now trading comfortably above 110 and EUR/USD is well below 1.13. These important levels have limited the moves of both currencies for the past few weeks and the break today paves the way for further euro and yen weakness. The lack of US data, relatively minor decline in equities and a general increase in global yields mean there was no specific catalyst for today’s moves. The only explanation is the return of liquidity in Asia as Chinese markets reopen for trading. While its not apparent today, there’s a lot to be worried about over the next few weeks. US-China trade talks continue, Theresa May will update Parliament on the progress she’s made in Brexit negotiations, funding for the US government runs out at the end of the week, the Reserve Bank of New Zealand meets tomorrow and the US Commerce department will be wrapping up its report on the need for car tariffs. Each of these events pose a significant downside risk to currencies but they could also lead to big short squeezes if the unexpected happens and they are resolved positively.
 
For USD/JPY in particular, the next stop should be the congestion zone between 111.25 and 111.70. Investors will be watching the showdown in Washington carefully as the talks broke down over the weekend. The good news is that the talks have stalled due to disagreements over immigrant detention instead of funding for a border wall. Democrats and Republicans don’t want to repeat of the 35 day shutdown so there’s a reasonable chance for an agreement but the amount of funds for a physical border wall has not been agreed. A bill needs to be passed within the next 2, 3 days max for there to be enough time to pass the House and Senate. If an agreement cannot be reached, another temporary funding bill will be passed. Aside from what is happening in Washington, US data will also be in focus this week with CPI, retail sales, the Empire State and University of Michigan consumer sentiment surveys scheduled for release. If inflation and spending numbers miss expectations, they could cut short the dollar’s rally.
 
The selling pressure in EUR/USD is intense with the pair falling 7 out of the last 8 trading days. No economic reports were released from the Eurozone today but the softness in data is finally catching up to the currency. German yields rebounded after dropping below 0.1% last week but even with the uptick, the low level of yields is consistent with a weaker currency. The next level of support for EUR/USD is the November low of 1.1215 which should be tested quickly. For the time being, the path of least resistance for EUR/USD is lower unless the U.S. decides to forgo tariffs on European car imports. A move down to 1.10 is very likely. Meanwhile low liquidity triggered a flash crash in the Swiss Franc at the start of the Asian trading session and while the currency recovered its losses just as quickly, USD/CHF quiet trended higher during the NY session. Like many other parts of the world, inflationary pressures in Switzerland are easing.
                                                                                                    
The UK economy is slowing and the weakness is adding pressure on sterling. This morning we learned that GDP growth fell short of expectations, the trade deficit narrowed less than expected and industrial production fell for the third straight month. Prime Minister May is set to present the progress that she has made to Parliament tomorrow and she could ask Parliament for more time. On Thursday, there will be a motion put forth for debate that would give MPs greater control of the Brexit process – none of this constitutes a vote but if May presents no meaningful updates and/or Parliament push to shift the process away from the government, sterling will find itself in even more trouble. All three commodity currencies also extended their losses as investors look forward to tough trade negotiations between the US and China.