Trade Yen? This Is The Key Driver
A pattern seems to be developing in recent weeks:
every 5 days of so, the market has a huge one-way move, then consolidates for
another 5 days, or at the very least until some important economic data comes
out. While this should not be much of a surprise in the middle of the summer
where trading desks are thin and risk aversion is running at very high levels.Â
Nonetheless, we have been fortunate to nimbly navigate this market. Our four
trades this month, all closed at present, have yielded respectable results.
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                     Entry                  Stop             Exit
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Naturally the question becomes,
“Now what?â€Â Well, regardless of the ever shifting landscape, there are trades
in the making that are compelling, if we are patient.
NZD/USD
In an environment where risk
aversion is running high, and equity and bond markets appear to offer little
compelling upside, yield will likely be high on trader/investor appetites. With
the kiwi offering over 400 bp’s more on ones money and an economy that keeps
surprising to the upside, it is one currency that needs to be considered for a
long. Nonetheless, Friday’s big move up has temporarily put the currency into
an overbought situation. Given that the market is thin and erratic, we would
wait for a pullback on either the daily or hourly chart before establishing long
positions.
USD/JPY
Oil remains the key driver
of USDJPY, with movements in US bond prices taking second stage. Despite news
that oil supply will be ramped up in the Middle East, WTI 1m crude rose to a
multiyear high of over $45.50pb on August 12th. Also, USDJPY has been supported
by MOF data that show lively portfolio outflows in the week to 6 August.
Japanese investors bought a net Y18.6 trn of foreign bonds in the week while
in-flows were negligible. Swiss-yen (CHF/JPY) has been the most sensitive cross
to higher oil
prices that are a combination of geopolitical
supply concerns and robust demand.
In addition to higher oil
prices having a negative impact on the Yen, Japan’s economy is now slowing.Â
Recent data has fell short of expectations, and there are massive foreign
positions in Japanese investments relative to previous large inflows, most
notably in 1999-2000. These positions will likely be trimmed as we move
forward.
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Source:Â UBS
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The Macro View
While
from a technical perspective the dollar has firmed up in recent weeks, the macro
backdrop has shown no improvement, in fact it has deteriorated. Witness last
Friday’s US trade balance, a reading of $55 billion. The deterioration in the
deficit was widespread. Exports fell 4.3% while imports were up 3.3%.
Petroleum-related products were only responsible for about a $2 billion increase
in imports. Meanwhile, imports of capital goods (excluding cars) rose 5.3%, to
$29.5 billion.
The numbers once again bring the question of the funding
of the current account deficit issue
squarely into focus. While for shorter-term trades, which has been our focus of
late due to the difficulty in determining much visibility going forward, this
data is somewhat irrelevant, we do need to always keep this in mind as we move
into the fall and traders begin to strategize positions as we round out the
year.
The Day Ahead
Treasury
Securities Flow (TIC) data due out later today will likely do little to support
the dollar after Friday’s fall. Last months data showed a significant drop in
inflows into US securities.
Today’s
Levels:
EUR/USD:Â
1.2333, 1.2300, 1.2313
USD/JPY:Â
111, 110.33, 110.55
NZD/USD:Â
.6625, .6685, .6607