What’s Today’s Best Case Scenario for USDJPY Bulls?

Market Drivers February 14, 2018
Risk aversion takes USDJPY below 107.00
GE GDP in line
Nikkei -0.43% Dax -0.70%
Oil $59/bbl
Gold $1335/oz.
Bitcoin $8800

Europe and Asia:
EUR GE GDP 2.3% vs. 2.3%

North America
USD CPI 8:30
USD Retail Sales 8:30

It has been another nasty session of risk off selling in Asia today, with Nikkei diving more than 600 points off its open before finally finding some buyers and ending the day down only 43 basis points. For FX, however, the damage was done as USDJPY tumbled in concert tripping stops at the 107.00 level and tumbling to a low of 106.83 before rebounding ahead of the European open after Japanese equities stabilized.

The latest drop in USDJPY did further technical damage to the pair as it now traded at the 106.00 figure for the first time since November of 2016. The pair is now down 5 out the last 6 weeks of trading as nothing seems to offer any solace to the bulls. Neither the high rates on the US 10 year nor the rebound in equities nor the relatively decent US economic data has proven to be catalysts for USDJPY buying.

Sentiment in the FX market is considerably more negative than in other capital markets with currency traders appearing to be far more skeptical about the prospect of Fed hikes this year. The market, of course, could be overreacting and the pair is now grossly oversold, but the price action suggests that FX market is simply not buying the “3.5% US super-growth” scenario and instead anticipates that the Fed will pull back from tightening as volatility and slower economic growth scuttle policymakers plans.

In Europe today Germany released its CPI figures and GDP data with both coming in line with consensus. Q4 GDP grew 2.3% as expected while CPI printed at -0.7%. EURUSD saw no reaction on the news, but remained near session highs as greenback weakness dominated.

If there is any hope for the buck to rally it will come from today’s US data – which is the marquee economic event of the week. The market is looking at both US CPI and US Retail Sales data today. The market is anticipating slightly cooler CPI readings at 0.2% versus 0.3% the month prior and but better Retail Sales numbers at 0.5% vs. 0.4%. If the news surprises to the upside on both events it could spur short covering rally in USDJPY and perhaps squeeze the late shorts all the way to 108.00. But such a move would require strong help from equities which it may not get if the inflation data shows a strong pick up growth.

Given the fact that most of FX trading over the past several weeks has been driven by risk on/ risk off flows the best case scenario for dollar bulls today maybe a soft inflation reading and a very strong result in US Retail Sales. That would spur a large rally in stocks and help lift USDJPY back above 108.00. However, if the data disappoints, the downside momentum could be merciless given the negative sentiment in the market today and USDJPY could see 106.00 before the session end.